The Federal Reserve is expected to hold interest rates at their current 22-year high for a second consecutive meeting later today as the US economy continues to show resilience.
Markets expect the Federal Open Market Committee to opt for another pause, keeping the federal funds rate at its current range of 5.25 and 5.5 per cent.
But continued labour market tightness, surprising consumer strength and solid economic growth mean the Fed will likely again highlight that further rate hikes cannot be ruled out, as the central bank continues its fight against inflation.
The Bank of England is also expected to opt for another pause at 5.25 per cent when its Monetary Policy Committee meets on Thursday.
Fed chair Jerome Powell has previously warned that signs of an overheating economy could mean interest rates may have to rise again
CME Group’s Fed Watch tracker shows markets are now pricing a 99.2 per cent probability of a pause, up from 96.7 per cent yesterday and 81.7 per cent a months ago.
By contrast markets are pricing a probability of a Fed funds rate hike to 5.5 to 5.75 per cent of just 0.8 per cent, down from 18.3 per cent a month ago.
And, while yesterday markets thought there was a thin 3.3 per cent chance of a rate cut, pricing now suggests a probability of zero.
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The Fed has opted for 11 rate increases since March 2022, helping bring the US inflation rate to 3.7 per cent in September, down from 3.67 per cent last month and 8.2 per cent last year.
But inflation remains above the Fed’s target of 2 per cent, driving concerns that the bank’s tightening cycle has not enough to sufficiently supress demand.
The US economy remains strong, with annual GDP growth of 4.9 per cent for the third quarter, solid consumer spending and historically low unemployment – all drivers of inflation.
The war on the Middle East, related oil price growth and a sell-off in Treasuries complicate the matter further.
Fed chairman Jerome Powell in October warned that signs of an overheating economy could mean interest rates may have to rise again.
Isabel Albarran, investment officer at Close Brothers Asset Management, said: ‘The Fed will have been perturbed by the continued resilience of the US economy, particularly evident in robust retail figures, and stronger-than expected Q3 growth data.
‘Nonetheless, we think the Fed will err on the side of caution and leave rates unchanged at the November meeting.’
Franck Dixmier, global chief information officer for fixed income at Allianz Global Investors, added: ‘We believe that the Fed has completed its rate hike cycle.
‘Of course, we cannot rule out the possibility of a final hike at the end of the year, which the markets are anticipating with a low probability (30 per cent).
‘But we believe that this would have only a limited impact on the markets. Investors are looking further ahead, preparing for a long period of plateauing interest rates, with the first cut anticipated in mid-2024.’
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