This week, the Federal Reserve is expected to slow the pace of interest rate hikes, while indicating that it is nowhere near halting its historic campaign to tighten monetary policy in light of persistent inflationary pressures.

After struggling this year to adjust policy fast enough to keep pace with inflation, the Federal Open Market Committee is preparing at its last meeting of 2022 to End A series of increases of 0.75 percentage point started in June. Instead, it would opt for a half-point move, which would raise the federal funds rate to a range of 4.25 percent and 4.5 percent.

The Fed’s message is that a slower pace of rate hikes does not mean that it is less committed to bringing inflation down to 2 percent. Officials on Wednesday will point to more monetary tightening in the coming year, and once again stress the need to keep interest rates at a high level for an extended period.

“You’ll hear them say, ‘It’s not time to relax,’” said Karen Dinan, a former Fed chief of staff who previously served as assistant secretary of the Treasury for economic policy at the Treasury Department. “We’ve seen time and time again that people are very optimistic about what it will take to extract that inflation. “

Federal Reserve officials will beef up their message on Wednesday with a new set of economic forecasts, which will clarify their individual views on the federal funds rate, economic growth, unemployment and inflation through 2025.

Jay Powell, the president, has already acknowledged that the peak rate of 4.6 per cent set in policy three months ago – the last time the forecast was published – will need to be raised “somewhat higher” due to signs that the economy is maintaining plenty of momentum. . Financial conditions have also deteriorated in recent weeks – risky assets have risen and borrowing costs have receded – undoing the Fed’s already tightening policy.

Now, the FOMC members and other regional heads are likely to show the policy rate topping between 4.75 percent and 5.25 percent and in order to maintain that level throughout 2023 as core inflation remains high at around 3 percent.

Many Fed watchers expect the “dot graph” of individual interest rate expectations to indicate a majority in favor of the policy rate peaking just above 5 percent, with a group positioned at the so-called final interest rate just below that level.

Calculate the difference nascent divisions between officials about how much more restraint is needed to bring inflation down to where they want it to be.

“The Fed is getting closer to appropriate policy setting in my view, which means we are entering a phase that involves smaller changes and more careful policy calibration,” said Brian Sack, director of global economics for DE Shaw Group. Former senior official of the Federal Reserve.

Some officials, such as Vice President Lyle Brainard and outgoing President Charles Evans of Chicago, have warned that the Fed is overdoing it on monetary tightening, arguing that inflation will decline quickly as supply distortions fade further and home prices expand rapidly. coming down.

Others, like Cleveland Loretta Meester and Governor Christopher Waller, they remain mainly concerned that the Fed is once again underestimating the scale of the inflation problem, particularly with regard to wage pressures from Flexible job market.

Matthew Luzzetti, chief US economist at Deutsche Bank, warned that a pessimistic outlook for the 2023 interest rate, which he described as a final rate of 4.9 percent, could limit the Fed’s options at a time when it needs to retain as much flexibility as possible. Given an uncertain look.

“A rate of 4.9 percent would suggest that they pause in March, and I don’t think they are very confident that the timing will be,” he said. “Offering a final rate in a slightly higher point scheme would be beneficial from a communications perspective.”

Traders are still in the fed funds futures markets the bet That the Fed will abruptly change course next year and cut rates by December — a view Mark Giannone, who previously worked at the Fed’s regional banks in Dallas and New York, expects officials to counter by delaying forecasting any cuts until 2024.

Any hesitation on this point “runs you at risk of easing financial conditions more quickly than they would like,” warned Giannone, who now works at Barclays.

Powell conceded that higher interest rates and the longer they stay there, the narrower the path to a “soft landing,” where inflation rebounds to 2 percent without a recession.

Though the president still claims that outcome is plausible — and officials’ projections are expected to reflect the same even as they cut growth estimates and raise their own unemployment forecasts — Fed staffers acknowledged last month that a recession was “almost as likely” as avoiding one. .

at recent days joint survey According to the Financial Times, 85 percent of economists surveyed expect a recession next year. In the event of a downturn, the unemployment rate would exceed 5.5 percent, which is estimated by the majority, much higher than the current level of 3.7 percent.