US Federal Reserve is expected to reduce the size of the hike for a second meeting in a row and increase interest rates by a quarter percentage point. Earlier, the US Fed climbed down from four consecutive rate hikes of 75bps to a 50 basis point increase in December.
The first Federal Open Market Committee (FOMC) meeting for the year is taking place on January 31 – February 1, 2023. The Fed rate hike decision will be announced on February 1 at 2:00 PM ET. The fed rate hike news is a keenly watched event across the globe among investors, traders, economists and analysts. Stock market participants are curious about both the size of the rate hike and the speech by Fed Chairman Powell at the conference that follows the event.
“The upcoming Fed meeting will set the standard for how we anticipate 2023 to play out. 2022 saw some of the most massive Fed rate hikes, with half-point and three-quarter point increases. To put this into perspective, we haven’t seen more than a quarter-point move since 2000. It is expected that this meeting will result in a quarter-point increase. We may have seen the last of major increases, but we should expect to see this continue, albeit less aggressively,” says says Kavan Choksi, a successful investor, business management, and wealth consultant at KC Consulting.
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The biggest challenge in front of Powell is to control inflation and yet sidestep a severe recession in the economy. How much higher the central bank expects to raise interest rates as well as what policymakers need to see before halting will be the main issues around which the stock market investors will watch Fed Chair Jerome Powell to talk during his post-meeting press conference.
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In 2022, interest rates were raised by 425bps and another 50bps of rate hike is expected in 2023. The terminal rate, therefore, may reach the 5% levels by the year-end. The US CPI data released in January pertaining to December prices showed annual inflation falling to 6.5% as against 7.1% seen in November. The Fed is expected to keep raising rates till inflation is controlled and fall under the target range of 2%. Markets are expecting a 25bps rate hike on February 1 to settle rates at a range of 4.5% to 4.75% .
In response to signals of sluggish inflation, Federal Reserve officials plan to decrease the pace of interest rate increases once more in the upcoming week. Meanwhile, Friday’s jobs report could indicate steady demand for labour, increasing the likelihood of a soft landing for the world’s largest economy.
As the cost of borrowing rises for both consumers and corporations, rate increases have an effect on the economy. Consumer demand eventually declines, which has a detrimental effect on the profitability and balance sheets of corporations.
When the Labor Department releases the Employment Cost Index, a comprehensive indicator of pay and benefits, the Fed will get another crucial read on inflation on Tuesday. On Wednesday, data on job opportunities for December and a January manufacturer survey are also due.