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Fed to avoid triggering recession but hawkish remarks expected: Economist

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WASHINGTON D.C., UNITED STATES: A view from the United States Federal Reserve Building in Washington D.C., United States on December 13, 2022. (Celal Güneş - Anadolu Agency)
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Dec 14, 2022 - 11:51 AM

ISTANBUL (AA) – The Federal Reserve will try to avoid triggering a recession but hawkish remarks are expected from the Federal Open Market Committee (FOMC) and the bank’s president, according to a leading economist.

The US central bank has raised its benchmark interest rate by 375 basis points, or 3.75%, since March in an attempt to bring record inflation under control. But its aggressive monetary tightening cycle has brought recession fears to the world’s biggest economy.

“The Fed will try to avoid rattling markets more than needed and potentially trigger a recession. That said, communication at the meeting will likely be hawkish, since inflation remains uncomfortably high, labor markets remain tight and financial market conditions have eased through November,” Martin Wurm, the director of economic research at Moody’s Analytics, told Anadolu Agency via email.

The Fed is widely expected to increase rates by 50 basis points after its two-day meeting Wednesday. The probability of that stood at more than 79% on Tuesday, according to the FedWatch Tool provided by US-based global markets company the Chicago Mercantile Exchange Group.

“Financial markets expect the Fed to slow the pace of hiking to 50 basis points (bps) and Chairman (Jerome) Powell indicated in a late November talk with Brookings (Institution) that the Fed is indeed getting ready to move slower going forward,” said Wurm.

Jobs, inflation figures not to alter decision

Wurm does not anticipate macroeconomic data, such as jobs figures coming above expectations or consumer inflation slowing in November, would alter the FOMC’s decision.

The American economy added 263,000 jobs in November, above estimates of 200,000, while job additions for October were revised up by 23,000 to 284,000. The strong figures early this month have caused fears of a higher rate hike from the Fed.

But annual consumer inflation coming in at 7.1% in November, down from the 7.7% in October, calmed markets early Tuesday when the Dow jumped more than 500 points at the opening bell.

Fed’s terminal rate estimated at 4.75% – 5%

“Financial markets as of today expect another 50 bps hike from the Fed this week, 50 bps in January/February and another 25 bps in March. Our December baseline forecast is slightly more optimistic with an additional 50 bps this week, 25 bps in January/February and another 25 bps in March. This puts our terminal rate estimate at 4.8%, with a range of 4.75% to 5%,” said Wurm.

The terminal rate, the peak spot where the federal funds rate is expected to climb before it is trimmed, will also be a key figure that investors are going to focus on when the bank’s projections are released Wednesday.

The FOMC raised its terminal rate estimates above 4% for 2022 and 2023, in its latest projections released Sept. 21, from 3.4% to 4.4% for 2022 and from 3.8% to 4.6% for 2023.

The Fed’s dot plot, the chart that records each official’s projection for short-term interest rates, “will be of particular interest because it will shed light on how the FOMC’s thinking about the terminal range has evolved since September,” according to Wurm.

“So far the Fed has only qualitatively indicated that rates will have to go higher than expected and stay high longer (than) expected, but has not provided a range of estimates for ‘how high’ and for ‘how long,’” he added.

Recession risks remain uncomfortably high

Wurm said it is likely the Fed will revise GDP growth projections downward.

In its latest projections in September, the bank said it expected the American economy to grow 0.2% this year, down from a previous growth forecast of 1.7% made in June. The estimate for 2023 was also lowered to 1.2%, down from a previous projection of 1.7%.

“However, the Fed is unlikely to predict a recession outright, as the labor market remains robust. The Fed’s hope is to slow wage growth without a big increase in the unemployment rate by instead reducing the large number of US job market openings,” said Wurm.

The Fed in its tightening cycle also has a strong interest in wage growth, especially if it shows a slowdown.

Wurm does not predict a recession in the December baseline but anticipates growth slowing to 0.9% in 2023.

“Recession risks, however, remain uncomfortably high, and we subjectively place the risk of recession within the next 12-18 months at around 50%. Leading recession indicators like inversion in the US Treasury yield curve since July also point to elevated risks,” he said.​​​​​​​

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