The Federal Reserve is widely expected to leave interest rates unchanged on Wednesday even as central bankers confront a surprisingly resilient economy and still too-high inflation.
But Wall Street is even more focused on Fed Chair Jerome Powell's press conference at 2:30 p.m. ET as they look for additional clues about whether the Fed is done raising rates, or if there is another increase in the pipeline.
Powell is likely to leave the door open to at least one more rate hike this year, though he will almost certainly insist that it depends on upcoming economic data releases – a message similar to the one he delivered earlier in October.
FED'S POWELL WARNS SLOWER ECONOMIC GROWTH MAY BE NEEDED TO COOL HIGH INFLATION
"Powell will likely stress that given the broad set of new and old uncertainties, the Fed can ‘proceed carefully’ in balancing the risk of tightening monetary policy too much against the risk of tightening too little," said Gregory Daco, EY chief economist. "But he will make sure to reiterate that it’ll take more than a few months of good data to give policymakers the confidence that inflation is moving toward the 2% target in a sustainable manner."
Fed officials have already raised interest rates to a range of 5.25% to 5.5% – the highest level in 22 years – in a bid to crush inflation. Although prices have fallen from a peak of 9.1%, they remain above both the pre-pandemic average and the Fed's 2% target.
FED'S FIGHT AGAINST INFLATION IS WEIGHING ON MIDDLE-CLASS AMERICANS
Hiking interest rates tends to create higher rates on consumer and business loans, which then slows the economy by forcing employers to cut back on spending. Higher rates have helped push the average rate on 30-year mortgages above 8% for the first time in decades. Borrowing costs for everything from home equity lines of credit, auto loans and credit cards have also spiked.
SILVER LINING OF HIGHER INTEREST RATES: SAVINGS ACCOUNT RATES
Yet the rapid rise in rates has not stopped consumers from spending or businesses from hiring.
Economic growth unexpectedly accelerated last week, with gross domestic product – the broadest measure of goods and services produced in the country – rising at a 4.9% annualized rate from July through September. It marked the best gain since 2021.
And against all odds, the labor market has remained very tight. Demand for workers continues to outstrip the number of jobs available, layoffs remain limited and the economy is continuing to add jobs at a solid clip.
Continued economic strength could prompt the Fed to approve another rate hike as concerns over an imminent recession fade. Many investors believe the Fed is done with its tightening campaign and will instead pivot to a higher-for-longer stance, but there is a contingent of traders that think the Fed will approve a 12th rate increase in December, according to the CME Group's FedWatch tool, which tracks trading.
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"We think there is enough momentum in the economy to warrant one more hike," Bank of America analysts said in a note this week. "But it is a very close call, as the economy could slow meaningfully in [the fourth quarter] for a variety of reasons, including a slowdown in business investment or inventory accumulation, the drag from student loan repayments, financial tightening and a potential government shutdown."
