Amid lower-than-expected inflation readings on Tuesday, the Federal Reserve is expected to drop plans for aggressive interest rate hikes on Wednesday aimed at cooling growth rates in the US economy.
The question now is whether the Fed will prove too aggressive in its bid to slow the economy and eventually trigger a recession that will result in more job losses than expected.
The Labor Department said Tuesday that annual inflation hit 7.1% in November, the lowest in more than a year. While still high compared to the 2% level at which the Federal Reserve normally aims to keep inflation in check, the latest figures suggest that gains earlier this year are slowing.
As a result, market analysts expect the Fed to announce another rate hike on Wednesday, likely less than the last four hikes, which was 0.75%.
Central banks are trying to raise borrowing and investment costs to reverse rising prices.
It seems to work. In addition to slower price growth, layoff announcements are piling up. To be clear, the Fed is not trying to create conditions that would expedite the layoffs. But the monetary tools it uses to control inflation can, in some cases, cause an economic slowdown that can force some companies to reduce their workforce.
Additional data from the New York Federal Reserve this week showed that US consumers now expect year-on-year inflation to hit 5.2%, down 0.7 percentage point from the previous month and the lowest expectations for the coming year since August in line with 2021.
In fact, many investors are turning their attention from expanding inflation to rapidly slowing growth, the Wall Street Journal reported Monday. It should be noted that the demand for bonds has increased, reflecting a growing interest in more stable yields, which often coincide with slower economic growth.
Out with inflation worries, with recession fears
Meanwhile, the stock market’s leading indicators continued to slip on concerns over weak corporate profits.
“What we’ve seen over the last month is weakness in energy, weakness in the financial sector, weakness in the stock market and then [the Treasury] interest rates are not going anywhere,” said Michael Antonelli, chief executive of Baird’s financial services group. Service. “This is a recipe for a market more worried about an economic slowdown than inflation.” If he is still worried about inflation then interest rates, energy and banks will be higher. So all signs of inflation have reversed.”
Despite signs pointing to slowing price growth, the Federal Reserve needs to reassure consumers and investors that it intends to stay on track to curb inflation, said Gregory Dako, chief economist at EY-Parthenon, a division of Ernst and Young LLP. This means that for now it will continue to signal that it is not planning to cut interest rates in the near future.
“The last thing the Federal Reserve wants is a tightening of financial conditions, which has now been reversed,” he said.
However, analysts agree that the Fed should not be as aggressive as it has been for most of the year.
“The Fed announcement is likely to pass through a hawkish peak,” Bank of America economists said in a statement Tuesday.
But it’s increasingly likely that the Fed isn’t just planning to hold off on raising interest rates in the coming months; It must also start plotting ways to revive the faltering economy.
In a note to clients on Tuesday, James Knightley, chief international economist at ING, said “recessionary forces” – such as reduced supply chain challenges, higher borrowing costs, weaker foreign demand, and sluggish global energy prices lower – means the Fed could start cutting interest rates in the second half of 2023.
Mark Hamrick, senior economist at Bankrate, said in a note on Tuesday that while a recession in 2023 is not a certainty, there is now broad agreement that risks remain and compromises have been made.
“To lift people, households and businesses from historically high inflation, the Fed is willing to risk a recession if it fulfills its price stability mandate,” Hamrick said.
“Choosing the lesser of two evils is no different than a firefighter trading off water damage for fire damage.”
This article originally appeared on NBCNews.com
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