Fed's Bold Strategy Shift
For the first time in nearly two years, the Federal Reserve is set to keep its key short-term interest rate unchanged for a second consecutive policy meeting. This reflects a significant shift in the Fed's strategy, signaling a potential end to its rate-hiking campaign.
The Current Situation
The Fed's decision to maintain the status quo is primarily due to the overall positive trajectory of the economy. Inflation has moderated, while hiring, consumer spending, and economic growth have remained robust. Contrary to predictions, a recession has not materialized.
However, the deceleration of inflation has slowed, and the potential for solid economic growth could elevate or further increase inflation. As a result, Chair Jerome Powell and other Fed officials are not ready to rule out future rate hikes. Powell is expected to emphasize the progress made by the central bank while underscoring the importance of managing inflation to meet the Fed's 2% target.
The Fed balances robust economic growth with turbulent financial markets, potentially causing an economic slowdown.
Economists estimate recent market fluctuations could act as an effective economic brake, alleviating inflation pressures but introducing risks.
The Fed's Role
Despite raising its benchmark rate, the 10-year Treasury yield continues to rise. Factors include government bond issuances and investor demand.
The Fed's Challenge
The Federal Reserve's top priority is the ongoing increase in the 10-year Treasury yield, even in the absence of their interest rate adjustments. This suggests that Treasury yields could remain elevated, posing potential limitations on economic expansion and inflation.
The Fed's Approach
Chair Powell has emphasized the need for a cautious approach, given the impact of tighter credit on the still-healthy economy. Other Fed members share this view, preferring to monitor economic developments before making any definitive moves on interest rates.
Wall Street traders are highly confident, with a 97% likelihood, that the Federal Reserve will maintain the current interest rates during the upcoming meeting. Moreover, there is a modest 29% probability of a rate increase at the December meeting.