- Markets are betting that the Fed’s key interest rate will be at the current 22-year high of 5.25-5.5%
- But the Fed may not be done yet amid concerns about the strength of the U.S. economy
The Federal Reserve is expected to keep interest rates at their current 22-year high for the second straight day later today as the U.S. economy continues to prove resilient.
Markets expect the Federal Open Market Committee to decide on another pause and keep interest rates in their current range of 5.25 to 5.5 percent.
But continued labor market tightness, surprising consumer strength and solid economic growth mean the Fed is likely to reiterate that further interest rate hikes cannot be ruled out as the central bank continues its fight against inflation.
The Bank of England is also expected to opt for a further break at 5.25 percent at its monetary policy committee meeting on Thursday.
Fed Chairman Jerome Powell has previously warned that signs of the economy overheating could lead to the need to raise interest rates again
CME Group’s Fed Watch tracker shows markets are now pricing in a 99.2 percent chance of a pause, up from 96.7 percent yesterday and 81.7 percent a month ago.
In contrast, markets are pricing in the likelihood of the Fed raising interest rates to 5.5 to 5.75 percent at just 0.8 percent, compared to 18.3 percent a month ago.
And while markets yesterday thought the chance of a rate cut was only 3.3 percent, prices now indicate a zero chance.
The M&G’s ‘scary’ charts: Inflation usually comes in waves
The Fed has opted for 11 rate hikes since March 2022, helping to bring U.S. inflation down to 3.7 percent in September, down from 3.67 percent last month and 8.2 percent last year.
But inflation remains above the Fed’s 2 percent target, raising concerns that the bank’s tightening cycle is not enough to sufficiently dampen demand.
The U.S. economy remains strong, with annual GDP growth of 4.9 percent in the third quarter, solid consumer spending and historically low unemployment – all driving inflation.
The war in the Middle East, the associated rise in oil prices and a sell-off in government bonds are further complicating matters.
Fed Chairman Jerome Powell warned in October that signs the economy was overheating could mean interest rates might need to be raised again.
Isabel Albarran, investment officer at Close Brothers Asset Management, said: “The Fed will be concerned about the continued resilience of the US economy, particularly evidenced by robust retail numbers and stronger-than-expected third-quarter growth data.”
“Nevertheless, we expect the Fed to be cautious and leave interest rates unchanged at the November meeting.”
Franck Dixmier, global chief information officer for fixed income at Allianz Global Investors, added: “We believe the Fed has completed its rate hike cycle.”
“Of course, we cannot rule out that there will be a final interest rate increase at the end of the year, which the markets expect with a low probability (30 percent).”
“But we believe this would have a limited impact on markets.” “Investors are looking further ahead and preparing for a long period of stable interest rates, with the first cut expected in mid-2024.”
The M&G’s ‘scary’ charts: ‘Real interest rates’ back in positive territory, making recession more likely