According to market estimates, the FED is expected to keep interest rates constant at its meeting on November 1.
This expectation is consistent with the recent dovish statements of FED officials and generally positive economic data.
The recent rise in long-term interest rates has also pleased the Fed, with agency official Christopher Waller noting that leaders are inclined to “let the recent rise in long-term interest rates do some of their work.”
Although there is still a possibility of an interest rate hike in December or later, the FED is currently satisfied with the course of the economy. The federal policy target is likely to remain between 5.25% and 5.5%, a 22-year high.
Waller gave a generally positive assessment of the U.S. economy in a speech in the United Kingdom on October 18. Waller mentioned that the FED had made “significant progress” in managing inflation and laid out a scenario in which they could “keep the policy rate constant and allow the economy to develop as desired.”
However, Waller also emphasized that inflation will be closely monitored. He argued that if the economy does not cool down somewhat and “inflation stabilizes or accelerates again”, “more action will be needed on the policy rate”.
There seems to be a shift in the direction that the Fed does not plan to raise interest rates again if the inflation trend continues. This contrasts with previous views that a new interest rate hike was more likely.
Federal Reserve Chairman Jerome Powell echoed many of Waller's comments in a speech in New York on October 19, calling the low inflation data “a very positive development.” Powell also noted that reaching 2% inflation “will likely be bumpy and take some time.” He added that if inflation progress was jeopardized, “there could still be meaningful tightening.”
Recent economic data has been encouraging for the FED. The most important thing seems to be that inflation has fallen. Although the FED has not returned to its 2% annual target, the rate of price increases is generally decreasing. The US labor market remains tight with low unemployment, but the imbalances that led to strong wage growth have resolved somewhat, leading to expectations that prices for services will cool.
Markets currently give a 1 in 20 chance that the Fed will raise interest rates on November 1, and surprises seem unlikely given how carefully the Fed manages short-term interest rate expectations.
However, expectations for a new interest rate increase may have shifted to a later date. According to CME FedWatch Tool, there is a 50% chance that the FED will raise interest rates by January. This could happen if future inflation reports are warmer than expected or if the economy overall shows limited signs of cooling.
*This is not investment advice.