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Sept 25 - It's a now-familiar dance: Federal Reserve officials signal to the world that interest rates are not dropping anytime soon. Financial markets respond with bets to the contrary.
Meanwhile, interest rate futures contracts continue to price in only about a 50% chance of further tightening in 2023, and see a 4.65% policy rate by the end of next year. INFLATION OPTIMISM Inflation by the Fed's preferred measure, the personal consumption expenditures price index, peaked in the summer of 2022 at 7% and had fallen to 3.3% this past July. With non-housing services inflation still sticky, Fed officials project underlying inflation pressures will ease only slowly from here.
The view of traders, and that of some economists, is that a faster loss of economic momentum and slowing jobs growth could forestall any further tightening and possibly trigger earlier policy easing next year. A menu of potential risks and shocks ahead complicates the outlook further, including the broadening of the United Auto Workers union's coordinated strike against the three big Detroit automakers; the resumption of student loan repayments next month, which could take a bite out of household spending; and a rise in energy prices that, if sustained, could push inflation back up.
Their latest quarterly forecasts imply they now feel they will need a higher inflation-adjusted"real" rate to adequately brake the economy and win the inflation battle.
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