The Federal Reserve is now set for a very contentious fight. They’ll be talking about a few interest rate cuts, while inflation is still hard at 3%. At its next meeting, the Federal Open Market Committee (FOMC) is set to be joined by new, hawkish-leaning members in January. We anticipate that this change will fundamentally raise the level of their discussions. The next FOMC meeting should confront today’s inflation crisis directly. It will be looking to gauge what markets are pricing in about any shifts in the Fed’s monetary policy.
Yet inflation has not been heading in the direction back toward their target, making their job difficult. The market is already hoping for the Fed to backslide on its hawkish moves in future meetings, starting with this month’s. There is a huge opportunity for failure. Widespread pundit speculation Analysts warn that the high level of inflation overall, along with no clear signs of a downward trajectory, make the Fed’s task unprecedentedly difficult.
The recent government shutdown has added yet another layer of clouds to economic data, yielding data that is mostly lagged by a mile. This predicament highlights the issue with trying to guess what the Fed will choose to do when faced with important economic data. The store sales picture from the latest retail sales report looks pretty soft. This has made for a very wary environment among reporters, analysts and economists.
As market participants speculate about the Fed’s next steps, they are pricing in significant dovishness for both this month’s meeting and into next year. A variety of reasons have experts warning that the market is too optimistic on the prospect for rate cuts. If inflation continues to hold firm, the Fed may face pressure to maintain or even increase rates rather than pursue a path of easing.
The stakes are high for the next FOMC meeting as it will cause a massive debate between committee members. …they will haggle over when and if rates should be cut. New hawkish voices are entering the fray. In doing so, their presence will surely intensify calls to focus on defeating still-elevated inflation rates and the unwarranted failure to make meaningful strides on key economic metrics.