On the heels of last Friday's softer-than-expected employment report, analysts seem to have gotten comfortable with the idea that the Federal Reserve won't be raising interest rates at tomorrow's Federal Open Market Committee meeting.
"With a number of economic indicators flashing signs of weakness, the Fed is expected to pause after hiking the federal funds rate 17 consecutive times, or 425 basis points, since June 2004," said Joe Quinlan, chief market strategist of Global Wealth & Investment Management at Bank of America. "That said, even as the Fed moves to the sidelines, we would caution investors that tomorrow’s pause is just that – a pause – and not the end of the rate-tightening cycle."
While economic growth does appear to be cooling, readings on inflation are not necessarily suggesting that the Fed has completely done its job.
"When it comes to maintaining growth versus maintaining price stability, the latter takes precedent," Quinlan said. "Against this backdrop, until various U.S. inflation metrics roll over, the Fed remains in play."
One of the most difficult issues the Fed has to grapple with is the time it takes for its moves to actually have an impact on the economy. While there is no set time frame favored by economists, the general feel is that it takes at least six months for a rate hike or cut to take effect, and some argue it can be as much as 12 months.
Against the backdrop of cooling economic data of late, it is indeed likely the Fed Tuesday will temporarily put an end to its tightening campaign in an effort to avoid ratcheting rates up too high. No harm in digesting another month’s worth of data before deciding on their next move.
While that will be welcome news to the manufacturing community – which is being pinched particularly hard by rising energy costs – Quinlan is right in suggesting that until the inflation genie is placed firmly back in its bottle, rates could go higher down the road.