fed chair jerome powell

The all-important December Fed meeting would conclude today. Fed chair Jerome Powell faces a tough balancing act amid still high inflation and rising recession fears.

The consensus view calls for a 50-basis point rate hike this month. This would mean the seventh consecutive rate hike of the year. Under Powell, the US Fed first went overboard with easing in 2020. The US central bank kept the party going in 2021 as well even as there were signs that inflation was going up.

Towards the end of 2021, the Fed began tapering its monthly bond buying and ended it fully in the first quarter of 2022. Since then, the Fed has raised rates at every meeting for a total of 3.75%. The current monetary policy tightening is the most aggressive since the 1980s. Powell has raised rates by 75 basis points each at the previous four meetings.

In usual times, the Fed revises rates by 25 basis points as was the case between 2015 and 2018. Powell himself admitted in June that 75 basis point rate hikes are not normal. However, sticky inflation, which peaked at 9.1% in June made the Fed reconsider its moves.

US inflation has now fallen to 7.1%. While it is still nowhere near what the Fed would like it to be, it is still much better than what we saw towards the middle of the year.

Fed Rate Hike Decision Today: Powell Faces a Balancing Act

The weaker-than-expected November CPI reading has almost ended the odds of a 75-basis point rate hike. Powell himself said earlier this month that the Fed was now looking to slow down the pace of hikes.

At the Brookings Institution Powell said, “My colleagues and I do not want to overtighten because…cutting rates is not something we want to do soon.” He added, “We wouldn’t…try to crash the economy and then clean up afterwards. I wouldn’t take that approach at all.”

Powell now has a tough balancing act on hand. On the one hand, the Fed still has a lot of work on inflation. On the other hand, it needs to prevent a hard landing for the US economy. Many economists now see a recession as imminent in 2023, partially because of high interest rates.

Elon Musk recently said that the recession would be “greatly amplified” if the Fed raises rates again

On multiple occasions, Powell has said that the rate hikes might lead to recession. He however emphasized that the Fed is not trying to force one. While recession impacts most sectors of the economy, some of the investments are largely recession-proof.

What do Markets Expect from the Fed?

Rick Rieder, chief investment officer of global fixed income BlackRock, believes that Powell’s press conference would be crucial. He said, “I think we’ve heard two different types of sentiment from the chair between the latest press conference and Brookings.”

Aneta Markowska, Jefferies’ chief financial economist also expects US stocks to “whipsaw” if Powell sounds hawkish.

Notably, after the Fed’s November meeting, US stocks initially rose. However, they crashed after Powell sounded quite hawkish during the press conference. Powell had then said, “The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive.”

Markets Would Await the New Dot Plot

After the November meeting, Powell also said that the terminal rates might be higher than what the previous dot plot suggested. He said, “We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”

Markets would now await the new Fed dot plot for insights on terminal rates. Goldman Sachs expects three rate hikes of 25 basis points in 2023 and predicts terminal rates between 5-5.25%. The Fed’s previous dot plot projected the terminal rates at 4.6% but economists expect the Fed to revise it upwards to 5% or higher after the December meeting.

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