US Fed likely to pause rate hikes and raise growth forecast

Washington – Analysts expect the US Federal Reserve to pause interest rate hikes on Wednesday as the central bank looks to tame inflation while avoiding a recession, despite a recent energy-fuelled rise in consumer prices.

After 11 interest rate hikes since March 2022, inflation has fallen sharply but remains stuck stubbornly above the Fed’s long-run target of 2 per cent per year – keeping pressure on officials to consider further policy action.

Despite rising slightly due to increased energy costs, US inflation remains well below last year’s peak, while economic growth remains robust and the unemployment rate sits close to record lows – raising hopes the Fed can slow price increases without triggering a downturn.

The decision by the interest rate-setting Federal Open Market Committee (FOMC) will be published at 2am on Thursday Singapore time, along with updated economic forecasts.

The Fed’s rate decision will be followed half an hour later by a press conference with Fed chair Jerome Powell, which will be closely watched for hints on the path of future rate decisions.

“We look for the FOMC to keep its target range for the federal funds rate unchanged,” Wells Fargo economists wrote in a recent note to clients, adding that “most market participants” expected the Fed to hold rates steady.

Sitting tight

That would leave the Fed’s key lending rate at its current range between 5.25 and 5.50 per cent – a 22-year-high.

Traders currently see it as 99 per cent likely that the Fed will hold off on hiking interest rates on Wednesday and a roughly 70 per cent chance it will vote to do the same at the next FOMC meeting in November, according to data from CME Group.

Policymakers on the FOMC are looking to keep the country on what Chicago Fed president Austan Goolsbee calls the “golden path”, attempting to slow down inflation while averting a surge in unemployment and a major economic slowdown.

“If you look at expectations in the marketplace, there’s a growing confidence that we can pull it off,” he said during a recent interview broadcast on NPR.

But Mr Goolsbee added that the Fed must remain “attentive to the data”, echoing Mr Powell, who has promised to follow a “data-dependent” path going forward.

Analysts at Goldman Sachs recently cut their expectation of a recession in the United States from 20 per cent down to 15 per cent, while other economists – including those in the Fed’s research team – say they no longer expect the US economy to contract in 2023.

Revision to growth

Alongside its interest rate decision, the Fed will also publish updated forecasts for a range of economic indicators, from inflation to growth, as well as with FOMC members’ expectations of future interest rate policy.

Analysts will be closely analysing these forecasts for signs of whether policymakers continue signalling they expect interest rates to rise higher than current levels – as they did in June – and for how long they think rates should remain high to bring inflation firmly back down to target.

They also expect the Fed to significantly raise its economic growth forecast for 2023 from its last update in June due to stronger-than-expected economic output.

Deutsche Bank economists wrote in a note they expect the growth forecast for 2023 to double from 1 per cent to 2 per cent. AFP