The market is looking for signs that the Fed will hike rates at its December meeting. While the market expects a modest hike, there are some indications that the Fed may be more inclined to hold rates steady. The December meeting will also include the update to the Summary of Economic Projections and a press conference. These events could provide clues on the Fed’s policy going forward, including the likelihood of a U.S. recession.
The Federal Reserve is widely expected to announce a 0.75 percent rate hike on Wednesday. Investors will closely monitor the move as the central bank seeks to strike a balance between increasing economic growth and fighting inflation. The Dow has gained 147 points this week, while the S&P 500 and Nasdaq Composite both added 0.4%. Meanwhile, bank CEOs are likely to be grilled about their consumer lending practices and how Washington is making their jobs harder. Historically, the Federal Reserve has faced pressure from market investors to raise interest rates aggressively. However, there are signs that the economy may be slowing, and this could prompt the central bank to halt rate hikes and reverse course.
Fed Chair Jerome Powell is scheduled to speak at 2:30 pm ET and is expected to reiterate that the central bank is committed to fighting inflation and will not backtrack anytime soon. The next Fed meeting is scheduled for December, and the Fed penciled in at least one more rate hike of three-quarters of a percentage point this year. That is higher than many forecasters expected. The Fed’s projections show that the unemployment rate will remain above the 2 percent goal through 2024. In June, the Fed projected unemployment at 3.9 percent, and it expects it to rise to 4.4 percent by the end of the year. The Fed is also expecting the unemployment rate to reach 4.4 percent in 2023 and 2024. That would be a modest increase, but it would still indicate that the economy is in recession. Do you have any idea about when is next fed meeting?
Earlier this week, the Federal Open Market Committee, or FOMC, announced that it intends to increase the federal funds rate by half a percentage point by the end of the year, a pace which should keep inflation expectations in check. This policy change follows the Federal Reserve’s commitment to keep rates at or below two percent, as indicated by its recent statements. During its remarks, FOMC Chairman Powell said that the Fed aims to raise rates in 50-basis-point increments until inflation is kept under control. Moreover, he noted that inflation expectations are increasing, which is “not healthy for the economy.”
The FOMC’s most direct influence on the economy is the nominal short-term interest rate. This rate is projected to be between 2.8 percent and 3.0 percent over the long run. This is below the average of six percent between 1960 and 2007. Although it is difficult to achieve the goal of zero percent interest rates, the Fed is unlikely to raise rates by four or five percentage points, which could prolong the recession and stifle growth.
Economic projections highlight the Fed’s willingness to tolerate pain. In late August, Chair Powell noted that “pain is part of the process.” He forecasts that the economy will grow slowly in the next two years and that the unemployment rate will peak at 4.4% by 2023. This implies that the Fed will tolerate a slowdown in the economy for a while, but will then raise rates again. The economic projections are mostly positive. By the time the next Fed meeting comes, the economy is expected to have expanded by a modest 1.7 percent. That’s below the potential growth rate, but higher than the long-term average. Inflation is expected to increase, but the labor force will continue to increase, keeping unemployment at a low level.
The Federal Reserve can dictate to banks the percentage of client deposits that must be held as reserve funds. A higher reserve requirement means less money available for lending, while a lower reserve requirement means easier access to the money. The Fed uses the discount rate, which is the interest rate that depository institutions charge to borrow money, to set the reserve requirements.
The Reserve requirements were first implemented on July 12, 1973, and they affected both time deposits and non-time deposits. The requirements were increased by half a percentage point for net demand deposits under $400 million, and they were cut by one percentage point for non-time deposits over $400 million. The actions were small, but had a significant impact on required reserves.