Trader in guessing about the Fed’s action
2022.12.05 06:26
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Trader in guessing about the Fed’s action
Budrigannews.com – The Federal Reserve’s policymakers have almost promised to slow down the rate at which they raise interest rates next week. Over the next few months, they hope to reach a policy rate that is high enough to reduce inflation but not high enough to crash the economy.
In a strategy that one U.S. central banker has dubbed “raise and hold,” they intend to maintain their current rate until they reach that level. This will allow the higher borrowing costs to circulate throughout the economy, cooling the labor market and easing price pressures.
It is not being bought by traders.
Futures contracts that are tied to short-term rates in the United States represented bets that the Federal Reserve would continue to raise rates next year, eventually reaching just under or just over 5% by May.
However, just a few months later, based on those same futures contracts, the central bank is seen turning around and cutting rates, bringing them back down by the end of 2023 to where they are expected to end this year, in the range of 4.25%-4.50%. This is in contrast to the report on Friday
Since the Federal Reserve kicked into high gear in the summer to combat price pressures at levels not seen in 40 years, traders have basically stuck to the belief that rates will follow a hump-shaped path over the coming year.
It coincides with indicators of the financial market, such as the inverted Treasury yield curve, which indicates the impending recession. Additionally, a number of economists, including some at the Fed, have predicted an increase in the unemployment rate of at least one percentage point over the next year from the current 3.7%, which is consistent with a recession.
When the economy is weakening, the Fed typically reduces interest rates.However, economists assert that all bets are off, including those made by futures traders, as inflation by the Fed’s preferred measure is three times higher than its target of 2%.
According to Aneta Markowska, an economist at Jefferies, “I think those expectations are premature.”The
Fed won’t be happy cutting rates until unemployment falls below 5% and inflation falls below 3%, in my opinion.It is unlikely that those requirements will be met until 2024.”
At the conclusion of their meeting on December 13-14, Fed policymakers will update their forecasts for unemployment and inflation. Some of them have already provided previews of their updated outlooks.
Even though unemployment, which is currently at 3.7%, is rising to between 4.5 percent and 5%, New York Fed President John Williams stated last week that he does not anticipate inflation to fall below 3% before the end of 2023.And rate hikes?He stated that probably not until 2024.
Other policymakers have attempted to convey a similar message, with Fed Chair Jerome Powell stating that it will take “some time” and Fed Vice Chair of Supervision Michael Barr stating that it will take a “long period” to eliminate the economy’s excessive inflation.
Powell stated on Wednesday at a Brookings Institution event, “My colleagues and I do not want to overtighten because… cutting rates is not something we want to do soon.”
One of the reasons he gave for delivering a half-point rate hike next week rather than the 75-basis-point rate increase that the Fed has delivered at every meeting since June was to avoid an overshoot that could crash the economy.
Powell stated that he anticipates that rates will eventually need to rise “somewhat higher” than the 4.6% that policymakers anticipated in September.”We wouldn’t just raise rates and try to crash the economy and then clean up,” he stated, however.
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