Federal Reserve expected to hold rates steady as consumer confidence improves – PPT News

The Federal Reserve is expected to keep interest rates at their current levels amid improving consumer confidence and a declining inflation rate.

On Wednesday afternoon at 2:00 p.m. ET, the central bank’s Federal Open Market Committee is scheduled to announce the decision, which could see the federal funds rate left unchanged at 5.33%.

In the run-up to the announcement, some Fed officials have been signaling that the current rate has been enough to knock inflation down toward the central bank’s 2% target.

The federal funds target rate remained between 5.25% and 5.5% since last summer following 11 increases that began in March 2022.

The rate hikes have raised borrowing costs throughout the economy since then, and the resulting pain has pulled down inflation which, in turn, has restored some consumer confidence. In December, the 12-month consumer price index reading, at 3.3%, was little changed from the previous month’s 3.1% measurement. And the Fed’s preferred inflation gauge, the personal consumption expenditures price index, came in even lower, at 2.6%.

In remarks earlier this month, Fed governor Christopher Waller said that slowing inflation combined with continued steady employment gains had led to an economic landscape that was “almost as good as it gets.”

“The progress I have noted on inflation, combined with the data in hand on economic and financial conditions and my outlook has made me more confident than I have been since 2021 that inflation is on a path to 2%,” Waller said in written remarks to the Brookings Institution, according to the Associated Press.

Meanwhile, two gauges of consumer confidence continue to show Americans are feeling more upbeat about the economy. On Tuesday, the Conference Board’s consumer confidence index reached a two-year high on what the business group said was “surging views of current conditions” and “declining pessimism about (the) future.”

That followed a reading earlier this month from the University of Michigan’s consumer confidence survey that reached its highest level since 2021.

Yet there are already some signals that post-pandemic economic growth has peaked. On Tuesday, the U.S. Labor Department reported fewer Americans quit their jobs in 2023 compared with 2022, while the seasonally adjusted level of quits in December fell to the lowest monthly level in nearly three years.

Economists believe workers are more inclined to leave their jobs if they believe a better opportunity awaits them.

“On balance, the different labor market indicators show that the labor market is holding up well, but there are signs of weakness such as lower hiring rates and rising unemployment rate,” analysts with Citibank said in a note to clients Tuesday. “We will continue to watch jobless claims data as one of the more timely indicators for the labor market.”

At 3.7%, the unemployment rate is now back to pre-pandemic levels, though it has crept higher from the post-pandemic low of 3.4% seen in January 2023. The four-month moving average of weekly initial jobless claims has not seen a meaningful increase in the entire post-pandemic era.

But January has seen a slew of layoff announcements, especially in more white-collar industries like tech and media.

“Increasing reports of localized layoffs confirm that labor market conditions are not as strong as they were a year ago and that some pockets of weakness have emerged,” said Lydia Boussour, senior economist at the consulting firm EY, in a note to clients Tuesday.

Still, traders believe the economy remains strong enough that they have estimated the probability of the Fed’s first rate cut happening in March at 41% — down from a 73% likelihood a month ago. If the Fed does indeed reduce interest rates in March, it will have been two years since it first began raising them to fight inflation.

Not everyone is that optimistic about an imminent rate cut.

“We think markets are overly optimistic that we’ll see a Fed interest rate cut in March,” said Vanguard Chief Global Economist Joe Davis in a note to clients Tuesday.

“It likely will be midyear before policymakers are confident that they have reined in inflation sufficiently to start cutting their target for short-term interest rates.”

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