As inflation falls, the FED is Likely to Temper the Next Rate Increase

On Wednesday, most people anticipate the Federal Reserve will hike interest rates by a quarter of a percent. The question that has to be answered now is, "what happens next."

At their meeting this week, officials from the Federal Reserve are largely expected to raise interest rates by a quarter point, further delaying an aggressive pace of rate rises in 2022 as they wait to see how quickly inflation will go away.

Moving rates gradually will allow Federal Reserve policymakers more time to analyze how high-interest rates need to increase and how long they need to remain higher to effectively manage inflation, both of which are looming concerns that are essential in nature. The responses will assist in establishing how much harm is inflicted on the labor market and the economy as a whole by the Federal Reserve in its efforts to curb price hikes.

Investors will be even more attuned to what may come next. Last year, policymakers at the central bank boosted interest rates to a level over 4.25 percent from near zero, and it is anticipated that they will hike rates to a range between 4.5 and 4.75 percent on Wednesday. Investors will be even more alert to what may come next, and they will study the Fed's announcement at 2:00 p.m. and the ensuing press conference by the Fed chair Jerome H. Powell for signals about the future.

In December, Fed policymakers projected that they would raise interest rates to slightly above 5 percent in 2023, then maintain them at a high level throughout the year. But the Fed will let the data they receive determine how much they raise interest rates and for how long they maintain them at that level.

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Since the latest decision by the Federal Reserve, inflation has significantly slowed down, and figures on the economy suggest that consumers are becoming more cautious and beginning to spend less. A number of anecdotes point to the possibility that consumers have become more price-conscious, which would make it more challenging for businesses to maintain the same level of significant price rises. At the same time, the job market continues to be extremely robust, and economists and central bankers have cautioned that a re-acceleration in GDP and inflation remains a possibility even though the employment market is still quite strong. Because of this, the Fed will probably continue to be cautious about prematurely declaring victory against inflation.

One particular word in the Fed's policy statement will be the center of attention on Wall Street, and that word is "ongoing." In the most recent few months, officials from the central bank have been quoted as saying that "further hikes in the target range will be reasonable."

Since there is a possibility that policymakers may stop rising interest rates at some time in the next few months, the issue that needs to be answered is whether or not this word will continue to have any significance. However, other economists believe that members of the Federal Open Market Committee, who are responsible for formulating policy, will keep it anyway in an effort to avoid giving Wall Street any indication that they have succeeded in their efforts to limit inflation.

In recent months, the Federal Reserve has been in a position where it is somewhat at odds with the financial markets. The members of the central bank have maintained that there is further work to be done on the front of policy to guarantee that they will bring inflation completely under control. The financial markets, on the other hand, have started to anticipate that the Federal Reserve will soon stop raising interest rates, most likely after they reach a range of 4.75 to 5 percent but maybe even earlier, and will then start reducing the cost of borrowing money before the end of 2023.

It is important for the actual economy when investors expect less aggressive policies from the Federal Reserve. Because of these expectations in the market, interest rates, such as those on house loans, fall to lower levels. In turn, this can enable economic activity go back up, which can be helpful even when central bankers are trying to slow it down.

According to the most recent reading of the Fed's preferred price index, inflation dropped from 5.5 percent in November to 5 percent in December. This was a slight decline from the previous month's reading of 5.5 percent. However, there are indications that the economy is performing about how the Fed had hoped it would, which is why many investors believe that very little more adjustment to policy would be required.

However, price rises have been slowing across the board for the past six months across a variety of metrics, and there are hints that the moderation is becoming more widespread. This is more than double the growth in prices that the Fed strives for on average over time, which is 2%. In addition, it looks like there will finally be a decline in demand.

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A significant number of economists anticipate that the slowdown in demand will continue. The cost of borrowing money increases with higher interest rates, making it more difficult to make large expenditures like purchasing a home or expanding a business. This should have the effect of slowing the labor market as well as the overall economy. Wage growth should slow down as a worsening hiring situation should cause it; early evidence shows that a slowdown is already started, and the Fed will get another important data on worker pay on Tuesday. A slowdown in wage growth would put additional pressure on consumer spending.

Despite the Federal Reserve's interest rate adjustments, the economy's resiliency may be bolstered by other factors. The unemployment rate is currently at 3.5 percent, which is its lowest level in the last half century, and a large number of employees are seeing faster-than-typical salary rises. Even though their stockpiles are getting smaller, consumers still have some funds stockpiled up from before the pandemic began.

Because of this, the Federal Reserve is taking a cautious position and attempting to prevent itself from stepping back too soon from its attack on inflation.

This week's post-meeting press conference with Mr. Powell will be particularly notable for the following reasons. Mr. Powell could join some of his colleagues, such as Lael Brainard, the vice chair, in highlighting positive recent developments on inflation and reasons why the economy might be headed for a soft landing. This is a scenario in which inflation decreases without directly causing a recession.

Many analysts believe Mr. Powell will take a more inflation-focused posture to demonstrate the central bank's dedication to fighting inflation. However, investors will be keeping a close eye on any signs that suggest either a narrative stressing progress toward reduced inflation or a narrative stressing how much more work remains to be done is gaining traction.

                       US Federal Reserve Bank to make first decision for interest rates for 2023