New York, United States (CNN)–The next meeting of the US Federal Reserve, Wednesday, will be one of the historic meetings. The Fed will either raise interest rates by three-quarters of a point for the third time in a row, to 3%, or raise them by an unprecedented full one percentage point to 3.25%.
But what will happen next depends on personal guesswork.
Wall Street is divided over whether the Federal Reserve will continue to raise interest rates aggressively in November, or if inflation pressures will subside enough to allow the central bank to slow the pace a bit.
As such, experts’ expectations for the Fed’s short-term interest rate after the November meeting range from 3.5% to 4%. But the outlook is more murky for December as economists expect rates to be as low as 3.75% or as high as 4.5%.
The big problem facing the Fed is that the economy still seems to be doing a little bit too well. Inflation is undoubtedly a big problem, but the labor market is strong, consumers are still spending at healthy rates, and home prices are still high despite a significant rise in mortgage rates.
“This data is likely to encourage the Fed to continue over-maxing, but it may also increase the likelihood that they will make a mistake in that policy sooner or later by significantly tightening fiscal conditions,” said Timothy Chap, chief investment officer at Girard, in a report. very much to fight inflation.”
In other words, an interest rate increase by the Fed may eventually calm the economy more than the central bank would like.
“Raising interest rates several times may push the economy into a mild recession. But he does not expect an economic collapse as big as 2008. It is likely to lead to a recession similar to what happened in 2001,” Chubb said.
More pain for stocks?
Even if the economy avoids a major downturn, there are growing concerns that the stock market, which has had a bleak year, may be on its way to more pain for the long haul.
Investors have no idea what rates will reach by the middle of next year, with forecasts for July 2023 ranging from 3.25 to 5% at their peak. Moreover, other central banks, especially the European Central Bank, are likely to ramp up the pace and scale of interest rate increases as well, and this could lead to more volatility in the market.
“The major central banks still have to do some work on inflation, including the Fed and the European Central Bank,” Luigi Speranza, chief economist and global head of BNP Paribas Markets 360, said in a report.
Speranza added that a recession in Europe is “inevitable”. Although it may not be “deep”, he thinks it will be “long”. As for the US, he said, “the overall outlook looks less negative than in Europe but a restrictive policy and less growth trend is needed to tame inflation.”
It was all a rude awakening for investors, who had hoped Fed Chairman Jerome could do other things. The Fed will not be able to slow the pace of rate hikes anytime soon unless the pace of increases in consumer prices begin to cool off more quickly and significantly in the coming months. It also becomes less likely that the Fed will have the ability to pause in 2023 and start signaling rate cuts eventually.
The Fed relies on data, says Powell. So far, it seems that all the data is pointing to further increases and that prices will stay higher for a while longer.