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Why Markets Care About A Federal Reserve Meeting Where No Rate Change is Expected

  • The Federal Reserve is widely expected to hold its benchmark interest rate steady when it meets next week, so all eyes will be on what Fed officials say about their future actions.
  • With inflation on a downward trajectory, the Fed has reason to cut rates next year, and could do so as early as March, according to market predictions.
  • Fed officials are likely to emphasize the possibility of future rate hikes if inflation fails to subside to a 2% annual rate.
  • Fed chair Jerome Powell and other Fed officials have sought to communicate to the public their determination to get inflation down to the target rate no matter what.
  • The Fed has raised the rate 11 times since March 2022, pushing up borrowing costs on all kinds of business and consumer loans. 

When Federal Reserve officials meet next week, they’ll almost certainly leave the central bank’s benchmark interest rate unchanged—but despite the lack of action, what policymakers say, or don’t say, could still move markets.

Market participants are hungry for information about when the central bank will begin to lower its benchmark interest rate, which currently stands at its highest since 2001. The Fed has raised the rate 11 times since March 2022, pushing up borrowing costs on all kinds of business and consumer loans. The hikes are an effort to slow the economy and put a lid on inflation that soared to 40-year highs in the summer of 2022.

In recent months, the news on inflation has all been good, with consumer price increases falling steadily toward the Fed’s goal of a 2% annual rate. That’s prompted traders to speculate that the Fed will stop squeezing the economy so hard, potentially lowering the benchmark fed funds rate soon. As of Friday, markets were pricing in a 45% chance the Fed would cut its rate at its meeting in March.

Last month, Fed chair Jerome Powell tried to throw cold water on that idea, saying it was “premature” to speculate about rate cuts, and noted the Fed could raise the rate higher if inflation takes a turn for the worse 

Several economists predicted Powell and other Fed officials would continue hammering that message, via the Federal Open Market Committee’s official statement and the press conference afterward, as well as in the set of economic projections by FOMC members set to be released Wednesday afternoon. 

“Despite the more encouraging news on inflation, we expect Fed officials at their meeting next week will push back hard on the narrative forming in markets that rate cuts could come as soon as March,” Michael Pearce, chief U.S. economist at Oxford Economics, wrote in a commentary. 

At the same time, Fed officials have increasingly acknowledged that their anti-inflation rate hikes have squeezed the economy hard, and risk slowing it down too much and causing a recession. The job market has slowed in recent months (though not to the point of mass layoffs); banks have gotten choosier about who they lend money to; and some sectors of the economy, including the housing market, have slowed to a crawl.

The Fed’s own “beige book,” a collection of anecdotes from business and civic leaders around the country, released last month, was full of reports of households struggling to make ends meet and doing things like sharing homes, and meals, to get by. Those effects could worsen the longer interest rates stay high.

Still, Fed watchers widely expect a barrage of tough talk from Powell. That’s partly because the Fed’s communications are themselves a weapon in the Fed’s arsenal against inflation. The conventional wisdom among central bankers is that the public perception of the future path of inflation is at least partly a self-fulfilling prophecy.

If people believe future inflation will be high, they might behave accordingly, making purchases sooner rather than later to get ahead of the price increases they anticipate. It will also encourage them to demand higher wages—both actions that could serve to push up inflation, or so the theory goes. 

And if participants in financial markets believe the Fed is about to cut rates—which usually helps businesses—stock prices could soar and interest rates could fall, making money easier to come by and undermining the Fed’s fight against inflation. With all that to consider, Fed officials have good reason to be reluctant to declare victory prematurely.

The Fed’s reputation may also play a role in decisions about when to cut rates, and what to say about that possibility. The Fed was criticized in 2022 for being slow to react to early signs of surging inflation, as James Knightley and other economists at ING noted. Powell and other officials may be willing to wait longer to cut rates, just to avoid the possibility of looking foolish again if inflation bounces back. 

“Playing it safe should appeal to his instinct as a conservative lawyer: Why risk a hard-fought reputation when doing nothing suffices?” Knightley wrote. 

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