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Fed wants to avoid starting a recession, but hawkish comments are anticipated
According to a well-known economist, the Federal Reserve will make an effort to prevent the start of a recession, but the FOMC and the bank’s president are likely to make hawkish comments.
In an effort to curb record inflation, the US central bank has increased its benchmark interest rate by 375 basis points, or 3.75 percent, since March.
But the world’s largest economy is now experiencing recessionary worries as a result of its aggressive monetary tightening cycle.
“The Fed will make an effort to avoid jarring the markets more than necessary and maybe starting a recession. Despite this, since inflation is still uncomfortably high, the labor market is still tight, and conditions on the financial markets have improved through November, communication at the meeting is likely to be hawkish “Moody’s Analytics’ Martin Wurm, director of economic research, provided this information to Anadolu Agency via email.
After its two-day meeting on Wednesday, it is largely anticipated that the Fed would raise interest rates by 50 basis points. According to the FedWatch Tool provided by US-based global markets organization the Chicago Mercantile Exchange Group, the likelihood of that occurring on Tuesday was greater than 79 percent.
In a late November interview with the Brookings Institution, Chairman (Jerome) Powell emphasized that the Fed is absolutely preparing to move more slowly going forward. Financial markets anticipate the Fed will slow the rate of increase to 50 basis points (bps).
Jobs and inflation data won’t change the outcome.
The release of better-than-expected jobs data or a slowdown in consumer inflation in November, according to Wurm, won’t have an impact on the FOMC’s decision.
While the number of jobs added in October was revised up by 23,000 to 284,000, the American economy added 263,000 jobs in November, above predictions of 200,000. Fears of a larger rate hike from the Fed have been sparked by the excellent numbers from earlier this month.
Although the Dow soared more than 500 points before the opening bell on Tuesday, markets were calmed when annual consumer inflation came in at 7.1 percent in November, down from 7.7 percent in October.
Estimated Fed terminal rate: 4.75%–5%
“As of right now, financial markets anticipate three additional rate hikes from the Fed: 50 basis points in January/February and another 25 basis points in March. With an additional 50 bps this week, 25 bps in January/February, and an additional 25 bps in March, our December baseline estimate is a little bit more bullish. As a result, our estimated terminal rate is now 4.8%, with a range of 4.75% to 5% “explained Wurm.
When the bank releases its estimates on Wednesday, investors will pay close attention to the terminal rate, which represents the highest point before the federal funds rate is reduced.
In its most recent projections announced on September 21, the FOMC increased its terminal rate estimates by over 4% for 2022 and 2023 from 3.4 percent to 4.4 percent for 2022 and from 3.8 percent to 4.6 percent for 2023.
The graphic that shows each official’s forecast for short-term interest rates, known as the Fed’s dot plot, “will be of special significance because it will show how the FOMC’s thinking about the terminal range has changed since September,” according to Wurm.
He continued, “So far, the Fed has not provided a range of projections for ‘how high’ and for ‘how long,’ simply a qualitative indication that rates will need to go higher than expected and stay high longer (than) planned.
Risks of a recession are still uncomfortably high.
According to Wurm, it seems likely that the Fed will lower its estimates for GDP growth.
The bank predicted that the American economy will expand by 0.2% this year in its most recent predictions, down from a previous growth prediction of 1.7% issued in June.
Additionally, the estimate for 2023 was reduced from an earlier prediction of 1.7 percent to 1.2 percent.
“The labor market is still strong, so the Fed is unlikely to anticipate a recession in its entirety. The Federal Reserve hopes that by lowering the high number of job postings on the US labor market, pay growth will be moderated without significantly raising the unemployment rate “said Wurm.
In its cycle of tightening, the Fed is also quite interested in wage growth, particularly if it slows.
In the December baseline, Wurm does not forecast a recession, but he does expect that growth will drop to 0.9 percent in 2023.
“But recession risks are still uncomfortably high, and we estimate that 50% of the country will experience one in the next 12 to 18 months. Rising dangers are indicated by leading recession signs like the inversion of the US Treasury yield curve since July “said he.
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