Volkswacht Bodensee - US Fed starts policy meeting with smaller rate hike likely

The Federal Reserve has raised the benchmark lending rate seven times last year, walking a fine line between reining in costs and trying not to tip the world's biggest economy into recession.

The real estate sector, which is sensitive to interest rates, has slumped while overall consumer inflation and wage growth have cooled as well.

These indicators raise hopes that the policy-setting Federal Open Market Committee (FOMC) will announce a smaller, 25 basis points hike at the end of its meeting Wednesday.

A Fed spokesperson confirmed Tuesday that "the FOMC meeting began at 10:00 AM ET (1500 GMT) as scheduled."

"As the FOMC gathers for the first time in 2023, it will face a difficult challenge," said Gregory Daco, chief economist at EY-Parthenon.

On one hand, he said officials have to communicate their desire to maintain a "sufficiently restrictive" policy stance, which can help bring inflation down towards policymakers' two percent target.

The goal is to raise the cost of borrowing and cool demand.

While consumer inflation has come down from a painful 40-year high, it still stood at 6.5 percent in December according to Labor Department data.

But Fed policymakers are working to avoid nudging the US into a downturn if they tighten policy too much, Daco added.

And officials are now monitoring the impact of existing rate hikes, which take time to ripple through different sectors.

A quarter-point increase in February will mark a further step down after December's half-point hike, taking the rate to 4.50-4.75 percent.

Markets will focus on Fed Chair Jerome Powell's press conference after the FOMC meeting, watching for signals on how much further the Fed thinks it has to go, in order to lower prices.

Observers will also keep an eye out for Powell's outlook on the economy and whether a soft landing, where inflation falls without much increase in unemployment, remains likely.

For now, inflation is moderating but "not enough to prevent the Fed from hiking rates," said Ryan Sweet of Oxford Economics in a recent report.

"We look for Fed Chair Powell to signal the Fed isn't done yet," he said.

Sweet added that officials will likely press on with another 25 basis points rate hike in March.

Steve Englander of Standard Chartered Bank added: "The FOMC also is likely to make clear that any pause is intended to allow more time to assess incoming data, not as a definitive signal that the hiking cycle is over."

M.Odermatt--BTB