Investors eagerly anticipate the release of the minutes from the Federal Reserve’s latest meeting, which will be available a day earlier due to the Thanksgiving holiday.
These minutes are expected to shed light on the key considerations discussed by the Federal Open Market Committee (FOMC) as they weighed the decision to maintain the benchmark interest rate during their meeting from October 31 to November 1.
At present, the federal-funds rate remains at 5.25-5.50% following a previous increase in July. During the post-meeting press conference, Chair Jerome Powell emphasized that although progress has been made on inflation, there is still room for improvement. He also acknowledged the concern over rising bond yields, which have contributed to tighter financial conditions in recent months.
Powell remarked, “Given the uncertainties and risks we currently face, the committee is proceeding with caution.”
However, recent economic data has instilled optimism among investors regarding the effectiveness of the central bank’s policies. In October, the labor market exhibited signs of slowdown, as job creation slowed, wage growth cooled, and the unemployment rate rose to 3.9%.
Moreover, the latest consumer price index revealed weaker inflation numbers, primarily driven by falling gasoline prices. In October, inflation grew at a slower pace of 3.2% year over year, compared to rates of 3.7% in both September and August. These figures fell below expectations based on data released by the Bureau of Labor Statistics on November 14.
As inflation continues to decrease, the so-called real interest rate will become more restrictive even if there are no further hikes. This could potentially dampen economic momentum. However, current market sentiment remains positive, with the S&P 500 hovering just below a 20% growth rate for the year.
Inflation: Is It Really Conquered?
The recent stock rally and overall market upswing since November 1st have led many to believe that inflation has been defeated. However, experts remain cautious, suggesting that there may still be uncertainties ahead.
Central Banks’ Cautious Outlook
Central bank policy makers have also expressed their concerns about the current economic situation. While they have acknowledged the market’s optimism, they maintain a cautious outlook and warn against premature declarations of victory. They emphasize that further tightening measures may still be necessary if economic data supports it.
Rising Headwinds
The central bank officials are not oblivious to the existing challenges. They have recognized the restrictive policies in place both in the U.S. and globally, which may pose additional hurdles to economic growth. For instance, Fed Gov. Lisa Cook has closely monitored lower-income households, small businesses, and the housing sector for any signs of financial strain.
Interest Rates to Remain Steady
Despite these concerns, most investors believe that the central bank will keep interest rates unchanged for the near future. Market expectations indicate a 0% chance of a rate hike at the December meeting and only a 2.1% chance in January.
Fed’s New Year Resolution: Policy Recalibration
EY Chief Economist Gregory Daco suggests that the Federal Reserve’s tightening cycle is likely complete. While policymakers may not explicitly announce it, they are expected to include “policy recalibration” on their New Year’s resolution list.
In conclusion, while the market may appear confident in its declaration of victory over inflation, it is essential to remain cautious about the future. The central banks’ watchful approach and acknowledgement of potential challenges indicate that there may still be bumps along the road to economic recovery.
The FOMC minutes will be released at 2 p.m.
