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Focus on the Fed’s direction and reducing future rate hikes: Expert

The Federal Reserve’s crucial two-day meeting, which will end on Wednesday, is the center of attention.

Investors are waiting to see if the central bank will signal that it will stop increasing interest rates in the future.

According to Mark Zandi, chief economist at Moody’s Analytics, who spoke to Anadolu Agency via email, “the key will be what, if any, guidance policymakers will provide regarding scaling back future rate increases in the Federal Open Market Committee (FMOC) statement and Chair Jerome Powell’s press conference.”

The Fed’s benchmark interest rate has been raised by a total of 300 basis points since March to contain record inflation, which is still circling around its highest level in more than 40 years. The FOMC is anticipated to raise the federal funds rate by 75 basis points to the target range of 3.75 percent to 4 percent.

According to the FedWatch Tool offered by US-based global markets firm Chicago Mercantile Exchange Group, the likelihood of a rate increase of 75 basis points is greater than 80%, while the likelihood of one of 100 basis points is less than 20%.

US annual consumer inflation inched down to 8.2 percent in September from 8.3 percent in August, while producer inflation increased by 8.5 percent, a slower rate than in August when it jumped by 8.7 percent.

Both figures represent a substantial drop from the record levels seen earlier this year.

Producer prices experienced their biggest annual surge since a record 11.6 percent advance in March, while annual consumer prices posted a 9.1 percent gain in June, the greatest 12-month increase since November 1981.

Although the Fed might hint at reducing the pace of future rate increases in an effort to rein in inflation, this year’s rate increases are not anticipated to come to an end.

Investors currently expect another 25 basis point increase in the fund’s rate target in January and another 50 basis point increase in December, with a break in rate increases after that to assess the effects of the higher rates on the economy and inflation, according to Zandi.

The FOMC has recently been “extremely outspoken” about its hawkish view, while the Fed has embraced an aggressive monetary tightening strategy.

Economic experts are concerned that the central bank’s cycle of monetary tightening, which has seen US equities decline recently with the exception of October, may cause the world’s largest economy to enter a recession next year.

The Dow Jones rose around 14 percent in October, setting its biggest monthly record since 1976, in anticipation of a possible Fed indication that it will ease up on future hikes. Last month, the S&P 500 and the Nasdaq both had increases of 8% and 4%, respectively.

According to Zandi, there is a higher chance that the economy will avoid a recession if the Fed decides that raising interest rates by 50 basis points in December and an additional 25 basis points in January is “adequate to control inflation.”

However, he continued, “the economy is likely to experience a recession, presumably in the second half of 2023, if the Fed thinks that even more rate hikes are necessary later next year.”

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