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Business News/ Economy / US Fed policy outcome: 6 key things that will be in the Fed's mind before making a rate decision today

US Fed policy outcome: 6 key things that will be in the Fed's mind before making a rate decision today

The US Federal Reserve is expected to maintain a pause on interest rates after its two-day meeting, with questions focused on whether the Fed will opt for rate reductions or signal further rate hikes.

The US Fed's current monetary tightening cycle started in March 2022. AFP PHOTO/Karen BLEIER/FILES (AFP)Premium
The US Fed's current monetary tightening cycle started in March 2022. AFP PHOTO/Karen BLEIER/FILES (AFP)

The US Federal Reserve is most likely to maintain a pause on interest rates for the second consecutive time after the conclusion of the Federal Open Market Committee's (FOMC) two-day meeting on Wednesday, November 1. In its previous policy meeting on September 20, the Fed chose to leave the benchmark interest rates unchanged, with a range of 5.25 per cent to 5.50 per cent.

Market participants and economists will be closely monitoring the Federal Reserve's policy outcome for insights into the central bank's assessment of inflation, the state of the US economy, and its expected interest rate path. Key questions revolve around whether the Fed will opt for interest rate reductions in the near term or maintain a more hawkish stance by signalling further rate hikes.

Here are the six key things that may be on the Fed's mind before making a rate decision today:

1. The state of the US economy

The US economy remains resilient as in the September quarter it grew at the fastest pace in nearly two years, buoyed by strong consumer spending despite higher interest rates. As Mint reported earlier, the gross domestic product (GDP) of the US expanded at an annualised rate of 4.9 per cent in the third quarter, the US Bureau of Economic Analysis (BEA) first estimate showed on Thursday, October 6.

Meanwhile, the US labour costs increased significantly in the September quarter amid strong wage growth. According to a Reuters report, quoting the Labor Department's Bureau of Labor Statistics data, the Employment Cost Index (ECI), the broadest measure of labour costs, rose 1.1 per cent last quarter after increasing 1 per cent in the April-June period.

The robustness of the US economy is likely to push the Federal Reserve to maintain an aggressive approach to achieving its 2 per cent inflation target.

Also Read: US Fed preview: Rate hike or a pause? Experts weigh in

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2. Inflation easing but still above the 2% target 

The US inflation cooled off significantly in September but it remains well above the Fed's 2 per cent inflation target.

"The personal consumption expenditures price index, which is the Fed's preferred inflation gauge, rose 3.4 per cent in September from a year earlier, a Commerce Department's Bureau of Economic Analysis report showed on Friday, and the core PCE price index, which the Fed takes a signal for future price pressures, rose 3.7 per cent. That's down from a 3.8 per cent reading in August," according to a Reuters report.

Inflation above the 3 per cent mark indicates that the fight against it will continue and rate cuts are still far.

3. High for how long?

The US Fed's current monetary tightening cycle started in March 2022. At present, the benchmark interest rate, or the federal funds rate, is at a 22-year high.

Experts are of the view that the Fed will keep interest rates at elevated levels for a longer period.

"As of now, we still think July was the last hike, but we do reckon that the resilience in both Inflation and growth is reinforcing the higher-for-longer stance even as financial and geopolitical shocks loom over the outlook," said Madhavi Arora, lead economist at Emkay Global Financial Services.

Also Read: Fed Officials Debate Whether They Have Raised Rates Enough

4. Rising bond yields

The US 10-year bond yield, which serves as an important indicator for worldwide interest rates on borrowing, has jumped sharply from 4.09 per cent on August 31 to 4.90 per cent now on expectations of further rate hikes. This has raised borrowing costs in the US and experts believe the Fed will keep surging bond yields in mind before deciding its policy stance.

"Treasury yields irrespective of Fed outcome have risen on the risk of continued supply of US treasuries. As the US continues to issue long-dated treasuries to fund its fiscal deficit, yields will also continue to remain elevated. In addition, every central bank always has other tools (other than rates) and in the Fed’s case QT (quantitative tightening) at their disposal to tweak yields in the system. Overall, rate hike or not, the outcome may be that yields will remain higher for longer," said Anitha Rangan, Economist at Equirus.

5. Mood of the market

The sombre mood of the market is an important factor that the Fed may consider in its policy meeting. Experts point out that the market is expecting interest rates to have peaked. However, if the Fed's tone remains significantly hawkish, it can further deteriorate market sentiment.

6. Geopolitical developments

The Russia-Ukraine war and the Israel-Hamas war are the important geopolitical events that the Fed will keep in mind in its policy meeting. The Israel-Hamas war enters day 26 and the efforts to end it have not yielded the desired fruits so far. Experts say the geopolitical risks are grave and if the conflict spreads to other countries in the region, it will deal a serious blow to the global economy.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 01 Nov 2023, 12:57 PM IST
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