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FED Meeting December 2023: What will happen according to the experts?
Macro

FED Meeting December 2023: What will happen according to the experts?

The Federal Reserve has its last meeting of the year today, and it seems likely that the institution will maintain interest rates, but is there a possibility of a surprise?
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13 DEC, 2023

By Johanna Zidani from RankiaPro Europe

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The Federal Reserve has its last meeting of the year today, and it seems likely that the institution will maintain interest rates, given that inflation in the United States has dropped to 3.1%. But will it actually be so, or is there a possibility of a surprise? This is the opinion of the experts:

The Fed is in no hurry to lower interest rates

François Rimeu, Chief Economist at La Française AM

The Federal Open Market Committee (FOMC) is expected to keep the current interest rates at its meeting this month (on the 12th and 13th). Fed Chair Powell will emphasize the dependence of monetary policy on economic data. While we anticipate some minor changes in the statement, which would hint at a decrease in federal funds rates for 2024 and 2025, we do not foresee significant changes.

Specifically, here are our expectations for this week's meeting:

  • The Fed's benchmark rates will remain between 5.25% and 5.50%.
  • Jerome Powell may suggest a possible rate hike if necessary.
  • Recognition of some progress toward the inflation target, but Fed Chair Powell will warn against premature rate cuts.
  • The Fed's balance reduction schedule should stay as is, at $95 billion per month.
  • Dot Plot Forecasts: Lower midpoints for 2024, 2025, and 2026 (-25 basis points across the curve).
  • Revision of growth forecasts for 2023 to 2.5%, but no changes for 2024-2026.
  • Downward revisions to the median of general and core inflation expectations for 2023, 2024, and 2025.

Overall, Fed Chair Powell is likely to maintain a balanced stance to curb expectations of early interest rate cuts in 2024. However, convincing investors may prove challenging given the rapid decline in inflation towards the 2% target. External factors such as upcoming CPI figures, bond auctions, or Treasury announcements may have more influence on fixed-income markets than the FOMC press conference itself

The Federal Reserve will maintain a moderate profile of rate cuts

Raphael Olszyna-Marzys, International Economist at J. Safra Sarasin Sustainable AM

It is assumed that the Fed will maintain interest rates this week. Significant progress has been made in reducing inflation, but self-complacency cannot be afforded. Core inflation remains high, and the labor market is too tight. The Federal Reserve will maintain a moderate profile of rate cuts, as indicated by its new dot plot.

The major central banks meet for the last time this year. Overall, they have become more moderate lately, as inflation has surprised on the downside, and labor markets have cooled. Economic activity has stalled or contracted in Europe, and growth in the U.S. seems to have slowed considerably in the last quarter. Recent movements in fixed-income markets have also been quite volatile, suggesting a one-way path for official interest rates. The only question left to resolve is the timing and magnitude of the cuts. The market is betting that there is a significant probability that central banks will start relaxing their policies as early as March.

We expect some pushback (moderate), with central banks pointing out the rigidity of labor markets and the risk of declaring an early victory against inflation. But, in the end, it will be the data that determines the central banks' policy stance and the future actions of the markets.

We expect the Federal Reserve to keep its official interest rate unchanged and highlight the progress made in rebalancing the economy. However, it will also indicate that policy must remain restrictive for some time to finish the job (Chart 1). Jay Powell will not rule out further rate hikes. He is likely to emphasize, once again, that what matters most at this moment is how long interest rates will remain restrictive. All eyes will be on the new dot plot and the number of cuts that Fed officials 'signal' for the next year.

On the other hand, we do not expect the new round of macroeconomic projections to show substantial changes in the growth, inflation, and unemployment figures for 2024 and 2025 published in September. The bar for rate cuts will continue to be relatively high. Inflation for 2023 is expected to be revised downward (from 3.7% to 3.4%), and growth upward (from 2.1% to 2.7%). This implies that the new dot plot still implies likely cuts of 50 basis points in rates next year, leaving the Federal Reserve funds rate at 4.9% at the end of 2024, instead of 5.1%. This would still be well above current market expectations (4.1%) and ours (4.4%).

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