Federal Reserve Chairman Jerome Powell is expected to hold a press conference after the Fed’s policy-setting body ends its two-day meeting on Wednesday – Copyright AFP Nhac NGUYEN

Beiyi SEOW

US central bankers open the second day of a key policy meeting on Wednesday with growing anticipation of a smaller hike in their benchmark interest rate as inflation showed signs of easing.

The Federal Reserve has embarked on an all-out campaign to cool demand in the world’s largest economy, raising rates six times this year with interest-sensitive sectors such as housing already reeling from policy tightening.

But there have been positive signs, with US consumer inflation easing in November, according to government data released Tuesday.

The consumer price index, a key indicator of inflation, posted its smallest annual rise in nearly a year, fueling optimism that the Fed may soon moderate its efforts.

Households have been pressured by red-hot prices, with conditions worsened by rising food and energy costs after Russia’s invasion of Ukraine and the fallout from China’s zero-covid measures.

To make borrowing more expensive, the Federal Reserve has raised interest rates six times, including four extraordinary 0.75-point hikes, bringing the rate to between 3.75 and 4 percent.

Analysts widely expect the Fed to adopt a smaller half-point hike on Wednesday, with Pantheon Macroeconomics’ Ian Shepherdson calling it a “done deal” in an analysis.

While this marks a step down from previous increases of 0.75 points, it would still be a steep jump.

Shepherdson warned that Fed Chairman Jerome Powell is “in no rush to say what markets want to hear.”

“(Powell) is unlikely to stray from his clear line that the Fed will do whatever it takes to squeeze inflation, and that some pain will be necessary,” Shepherdson added.

– ‘Still no evidence’ –

The recent relaxation in inflation data is good news for policymakers, but this “is not yet proof that inflation has cooled sustainably to levels consistent with the inflation target,” warned economist Edoardo UniCredit Bank’s Campanella in a note.

The Fed has a long-term inflation target of two percent.

“The Fed is likely to further reduce the pace of rate hikes early next year to as low as 25 basis points,” Campanella added.

“However, with the labor market still very tight… and with financial conditions generally easing, the Fed will probably say its job isn’t done,” he said.

Neil Saunders, managing director of GlobalData, added that the Fed is taking an “aggressive view on inflation” and will likely conclude that further tightening is needed, based on continued strength of underlying demand in the economy.

“As much as this action may have the desired effect, it will cool the economy at a time when it is already under pressure towards 2023,” Saunders said.

The Fed’s new rate hike will also mark “a new phase” in its tightening cycle, Nationwide chief economist Kathy Bostjancic said in a note Monday.

This occurs when officials seek to adjust the policy now that it is “within the range considered restrictive.”

Financial markets will be watching for signs of how high rates could be and “the path for rates beyond that peak,” he added.