Nick Timiraos, a well-known observer at the Federal Reserve and a famous journalist now known by Wall Street as “Nikileaks” (Nikileaks), wrote a preview of the latest Fed FoMC interest rate decision to be announced at 3 a.m. Beijing time on Thursday.

The article mentioned that officials are likely to keep interest rates unchanged and may lower investors' expectations of early interest rate cuts. Here are the main points of the article.

Federal Reserve officials will stabilize interest rates at 22-year highs this week, and may expect interest rates to be cut next year. Still, they won't announce an end to interest rate hikes this week, even as they increasingly believe they've done enough to reduce inflation. Federal Reserve Chairman Powell will deliver a speech at a press conference at 3:30 a.m., and his speech will be heavily interpreted to find clues about when and why the Fed may change its policy position next year. Here are some things to keep in mind:

Policy decisions

Last year, Fed officials raised interest rates at the fastest rate in 40 years to cope with inflation that soared to a 40-year high. This year, they slowed down the pace of interest rate hikes to watch the economy's reaction. They each raised interest rates by 25 basis points at their four meetings this year. The most recent time was in July, when the interest rate range rose to between 5.25%-5.5%. Since the next meeting will be held at the end of January, if officials keep interest rates stable this week, they will extend the suspension period of interest rate hikes to six months.

Officials are likely to keep the language in their policy statements that the next change in interest rates is more likely to raise than cut interest rates. Financial market participants will pay close attention to any softening of this so-called austerity trend, as this may be a precursor to a neutral stance in January or March next year — meaning their next change may be a rate hike, as well as a rate cut. However, a neutral trend may be a precursor to interest rate cuts.

Economic forecasting

The inflation rate at the end of this year is expected to be slightly lower than the September forecasts of Federal Reserve officials. At the time, officials predicted that the core CPI for the fourth quarter of 2023 (excluding volatile food and energy prices) would be 3.7% higher than the same period last year. According to data from the US Department of Commerce, the core inflation rate in October was 3.5%.

This slowdown has mainly occurred recently. According to data from the US Department of Commerce, in the six months up to October, the core inflation rate was 2.5% annualized, down from 4.5% in the previous six months. In September, most officials expected to raise interest rates once more this year, then cut interest rates at least twice next year. By the end of 2024, the Fed's benchmark interest rate will remain around 5.1%.

One big question this week is how officials are revising their forecasts for next year's inflation and interest rates. If officials predict that interest rates will still be 5.1% by the end of next year, then assuming no interest rate hikes, this will only result in a single rate cut. If officials maintain their predictions of cutting interest rates twice without raising interest rates, the predicted interest rate at the end of the year will drop to around 4.9%.

Investors in the interest rate futures market expect the Fed to cut interest rates by 1 percentage point next year, which means that interest rates will be cut four times, by 25 basis points each time. Any prediction that the Fed will cut interest rates more than twice next year is likely to cheer the market, as this will validate expectations of a shift to interest rate cuts sooner than most officials publicly support.

Officials found themselves in “a strange situation because they didn't want to say 'we won't cut interest rate', which eventually led to interest rate cuts five times next year. But if they say 'four interest rate cuts next year', then the market is likely to cut interest rates six or seven times, and they don't want that,” said Jon Steinsson (Jon Steinsson), an economist at the University of California at Berkeley.

Press conference

Powell's press conference may focus on a topic that officials have been reluctant to discuss: when to cut interest rates.

Officials don't want to claim victory on the inflation issue or cause a market rebound, making it more difficult to sustain the economic growth slowdown necessary to overcome inflation. Powell's former adviser, Antonio Bomfim (Anturio Bomfim), who currently works for Northern Trust Asset Management (Northern Trust Asset Management), said, “The market is somewhat oblivious to the possibility of recent interest rate cuts. My expectation is that he (Powell) will mildly oppose this view.”

The reason the Fed cut interest rates is important. Normally, interest rate cuts are meant to support a deteriorating economy and job market. In fact, this is the basis for some analysts to predict interest rate cuts next year. Matthew Luzzetti (Matthew Luzzetti), chief US economist at Deutsche Bank, predicts that as the economy falls into recession, the Federal Reserve will begin cutting interest rates in June next year and reduce the federal funds rate to around 3.5% next year. He said, “Under these circumstances, the reasons for the Fed to cut interest rates will be very, very clear.”

But Fed officials have acknowledged that they may cut interest rates next year for a simple reason: the inflation rate is moving towards the 2% target. Keeping interest rates stable while inflation falls will cause inflation-adjusted interest rates, or “real” interest rates, to rise, which the Fed does not want to see. Federal Reserve officials may lower nominal interest rates to prevent real interest rates from getting too high.

Risk management and interest rate cuts

The market is craving some level of clarity, and Powell is unlikely to provide that kind of clarity.

Federal Reserve officials are trying to balance two risks: one is that the pace of policy easing is too slow, which may cause the economy to decline under the weight of past interest rate hikes; the other is that policies are being relaxed too soon, causing the inflation rate to exceed 3% — far above the target of 2%.

Vincent Reinhart, chief economist at Dreyfus and Mellon, said it may be too early for many officials to be convinced that they have done enough to reduce inflation to 2%. “We are entering a period where they are very unhappy,” he said.

Brad, who stepped down as chairman of the St. Louis Federal Reserve in July this year, said he hoped to see the 12-month core inflation rate fall below 3% before considering cutting interest rates. He feared the “worst case scenario,” where the Fed cuts interest rates, then the inflation rate stagnates at 3% or even accelerates again. Brad, who is currently the dean of Purdue's Daniels School of Business, said, “This will put the Commission and the market in a very difficult situation. If it's not necessary, why get into this situation?”