Federal Reserve back in market spotlight as fourth successive 0.75% rate hike looms

The Federal Reserve is moving back into the market spotlight today at the start of a two-day rate-setting meeting at which it is expected to stop short of a 1% hike.

© REUTERS FILE PHOTO: Senate Banking, Housing and Urban Affairs Committee hearing in Washington

City and Wall Street experts are leading toward predictions of a 0.75% rise — softer than the 1% that some analysts had predicted further away from the meeting–  as the Fed seeks to control inflation. It would be the fourth consecutive meeting at which the Federal Reserve Open Market Committee has lifted rates by 0.75%. As talk of a bigger increase of 1% recedes, speculation has grown about when it might reduce the size of its rises for the first time in the current monetary policy tightening cycle.

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Commentators point to December as the month when smaller hikes may kick in, although there will be many economic releases before then that will shape rate expectations and policy makers’ thinking.

The Bank of England will follow the Fed into the spotlight later this week, with a rate decision on Thursday, the first since the. market turmoil unleashed by the Truss government’s now-demolished “mini”-Budget. It is thought likely to lift UK base rates by 0.75% in what would be the biggest rise since 1989 and would take rates to their highest since 2008 and the financial crisis. The propsects of full 1% rise have receded since the spending plans were redrawn in Downing Street.

Looking at th Fed, Matthew Ryan, head of market strategy at Ebury, the global financial services firm, described a 0.75% increase as “a done deal”, adding: “ future communications around rate hikes are more of an open question with a slowdown in the pace of rate increases likely to be on the way from December with a reversion to a 0.50% hike.”

The US central bank has repeatedly voiced its determination to tame inflation, with its preferred measure of core price rises running above 6%, way higher than the Fed’s inflation target of 2%. But recent signs in economic data  that household spending may be starting to cool are being seen by some as the first sign that higher borrowing costs are having the desired effect, opening the way for softer rate rises.

Closely watched US jobs data, due on Friday after this week’s rate call, will offer insight into the resilience of the US economy amid rising rates, which have, so far, not siginicantly hurt the employment market.

Some commentators were already pushing back against  growing expectations that Fed policymakers would appear more dovish, pointing to a softening of the action ahead on rates.

Francesco Pesole, an FX strategist at ING said: “A 0.75% hike is very much the consensus, but there has been growing speculation on some dovish pivot. We doubt the Fed will fuel such speculation tomorrow, which should set the stage for an extension of the dollar recovery in the second part of this week and beyond.”

The dollar index, which tracks the US currency against a range of others, slipped 0.2% to 111.36, trimming its gain over the year to just under 19%. Its long rally over 2022 has been driven by expectations that the Fed has more room to raise rates more quickly that other central banks without hobbling its economy.

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