The US Federal Reserve is widely expected to keep interest rates unchanged on Wednesday afternoon.The decision comes just a few days before the US midterm elections.
Why the Fed may still pause rate hikes
However, keeping rates unchanged in October would give Fed officials more time to study the economy and understand where it is heading, Yahoo Finance reported. Federal Reserve Chair Kevin Warsh will have to explain why the central bank is not raising interest rates now, even though inflation is rising again. Investors will watch his comments closely to understand whether the Fed may raise rates in the coming months. The latest data showed that prices in the US rose faster in September. This has raised concerns about whether the Fed can bring inflation under control. Matt Luzzetti, chief US economist at Deutsche Bank, expects Warsh to say that rising inflation could force the Fed to raise interest rates in the future. At that time, Warsh’s comments raised questions about whether the Fed had a clear and reliable plan to bring inflation down. This was higher than the previous reading, showing that inflation was rising again. The increase shows that inflation remains a concern. Higher costs for businesses could eventually lead to higher prices for consumers. The Fed also closely watches the core Personal Consumption Expenditures (PCE) price index to track inflation. These inflation figures have made the Fed’s decision more difficult. Keeping rates unchanged could give officials more time to assess the economy, but rising prices could increase pressure on the central bank to tighten monetary policy further. Krishna Guha of Evercore ISI expects Warsh to explain that the Fed looks at overall economic trends rather than reacting to a single inflation report. He also expects Warsh to point out that interest rate changes take time to affect the economy fully, as quoted by Yahoo Finance. Several Fed officials have indicated that more rate hikes may be needed to bring inflation under control. However, not all policymakers believe the central bank needs to act immediately. Fed Vice Chair Philip Jefferson and New York Fed President John Williams have indicated that the central bank can take more time to assess the effects of its previous decisions. They have also suggested that any further rate hikes do not need to happen at consecutive meetings. Michael Feroli, chief economist at JPMorgan, expects Warsh to repeat the message that the Fed is prepared to raise rates further but wants more time to assess the effects of the previous hike on the economy, as quoted by Yahoo Finance. Feroli believes that most members at the centre of the Fed’s rate-setting committee do not support a strong and aggressive cycle of interest rate hikes. This suggests that policymakers may prefer a more measured approach rather than raising rates sharply or repeatedly. The expected increase could make the decision to pause in October harder to justify. Feroli warned that leaving rates unchanged without a clear explanation, so close to the midterm elections, could lead people to question whether the Fed’s decisions were being influenced by factors other than inflation and employment. Despite expectations of a pause, Ed Yardeni, chief investment strategist at Yardeni Research, believes the Fed could still surprise markets by raising interest rates in October. He argues that such a move could help Warsh avoid being trapped by expectations created by other Fed officials. Source: Ed Yardeni, as quoted by Yahoo Finance. Warsh prefers to watch market signals to understand what monetary policy may be needed. However, other Fed officials have already given signals about the likely direction of interest rates. This has created expectations that the central bank will pause in October, leaving Warsh with less room to change the message without issuing guidance of his own. Yardeni argued that an October rate hike could help Warsh show that he is serious about moving away from forward guidance. Despite the possibility of a surprise hike, financial markets strongly expect the Fed to keep rates unchanged. However, he stressed that this does not mean inflation is no longer a concern, as quoted by Yahoo Finance. He believes an October pause would give policymakers more time to determine whether September’s inflation increase was temporary or a sign of a more lasting problem. Eastern Time. Investors will watch both the decision and his comments for clues about the future direction of US interest rates.
The US Consumer Price Index (CPI), which tracks the prices people pay for goods and services, rose 3.7% in September compared with the same month last year. Core CPI, which does not include food and energy prices, rose to 2.6%. Wholesale prices, which businesses pay for goods, also rose sharply by more than 6% in September. This measure was expected to rise above 3%, adding to concerns that inflation remains high. However, Feroli said Warsh would need to explain why the Fed raised rates in September when core PCE inflation increased by 0.2% in August, but was expected to rise further by 0.3% in September. Traders were pricing in a nearly 90% chance of a pause, according to the CME FedWatch Tool. The Fed’s interest rate decision is scheduled to be announced at 2 p.m. Eastern Time on Wednesday, followed by Warsh’s press conference at 2:30 p.m.
Because they can change quickly, these prices are left out. Because of the latest inflation figures, chris Hodge, chief economist at Natixis, said he does not expect the Fed to be pushed into raising rates.
Luzzetti said Warsh must avoid repeating the confusion caused during his July press conference. Luzzetti said Warsh would want to avoid giving the impression that the Fed is unwilling to take the necessary steps to control inflation that remains high. Yardeni said Warsh opposes forward guidance, which is when the central bank signals its likely future policy decisions in advance. He said Warsh could demonstrate this by persuading a majority of Federal Open Market Committee (FOMC) voters to raise rates despite market expectations of a pause, as quoted by Yahoo Finance. Hodge said Warsh has made it clear that he focuses more on overall economic trends than on any single inflation reading.
