Traders are marking time this week until the Federal Reserve announces its latest policy decision. While the overwhelming expectation is for the central bank to keep rates steady, some investors are looking for clues as to where the Fed may be heading next year when it updates its projections.
Investors are also waiting to hear whether the Fed will continue buying up $120 billion in Treasury bonds monthly. The move has been designed to help keep longer-term borrowing rates low and encourage consumers and businesses to spend.
Inflation remains the most significant market uncertainty as investors await a final decision on how the Fed will tackle the issue. The central bank’s hawkish officials have been concerned that inflation could take hold, especially after the pandemic disrupted global supply chains and increased prices. But in recent weeks, some of the Fed’s most ardent hawks have signaled they may be willing to ease up on rate hikes for now.
That may reflect the view that the economic recovery is still fragile and that even modestly rising interest rates could snuff out growth by increasing costs for consumers, businesses, and workers. The dovish signals have helped fuel speculation that the Fed might slow its rate hikes, which would send stocks higher and make it easier for businesses to raise wages.
The latest economic data have been mixed, however. While a new survey of U.S. manufacturers indicated that expansion cooled off in September, a separate report showed that wholesale inventories rose to the highest since March, suggesting that businesses continue investing in equipment and machinery. A survey of regional bankers showed that the overall economy continued to expand in October, though the pace was slower than last month.
Meanwhile, oil prices rebounded from a multi-month low. The price of Brent crude jumped 1% to $52.55 per barrel as investors were encouraged by indications that a production cut aimed at boosting global supplies might be in the works.
In the week ahead, the Fed is scheduled to release its monthly economic projections on Wednesday. Several economists expect the central bank to raise its target for short-term interest rates for a second time this year to between 2.5% and 2.8%. The Fed has kept rates near zero since the pandemic outbreak a year ago. That has helped to keep loan rates low for individuals and businesses to encourage spending. But, the rate increases by other central banks and the Fed’s recent actions have raised concerns about persistently high inflation levels in many parts of the world. The Fed’s policymakers are expected to discuss a wide range of factors as they weigh their options for the future of interest rates. Those discussions could lead to a surprising shift in rate expectations next year. Those views will be reflected in the minutes from the Fed’s most recent meeting, due to be released on Thursday.
