After its first policy meeting of the year, the US Federal Reserve will announce its decision on its benchmark interest rate tonight. Investors are expecting a quarter point adjustment or an end to hikes altogether.

An increase of 0.25 percentage points will take rates between 4.5% and 4.75% and mark a slowdown from the hikes delivered last year. 

In a bid to tame inflation, the Fed Reserve raised in December 2022 the rate by half a percentage point. Following the Fed’s decision, the UAE Central Bank raised interest rates by 50 basis points to 4.4%, from 3.9%.  

The last adjustment was lower than the four consecutive 75 basis point increases during the year, said to be the most aggressive policy in decades.  

Some analysts said the hike imposed last December was a sign that the Fed is going to take a more “hawkish” policy stance on interest rates and that the upcoming rate adjustment would be the last. 

According to David Mericle, Chief US Economist at Goldman Sachs, the Fed is expected to deliver three 25-basis-point rate hikes in February, March and May and then hold the funds rate at 5-5.25% for the rest of 2023. 

He said the Fed is not likely to bring down the rates just because inflation falls.  

“We are doubtful that the goods-driven decline in inflation that we expect in 2023 would be sufficient to give the FOMC confidence that inflation is moving down in a sustained way… I’m skeptical that the FOMC will cut just because inflation comes down,” Mericle said in a note. 

No end to rate hikes 

However, those who are expecting the Fed Reserve to stop raising interest rates may have to wait longer. The minutes of the Fed’s last meeting in December indicated that interest rates will still be kept elevated in 2023. 

“If anything, the meeting minutes confirmed that the Fed is going to keep interest rates elevated for the foreseeable future, as meeting participants explicitly warned against misinterpretation of the slowdown in its latest rate hike,” the World Economic Forum (WEF) said in a note in January. 

It also noted that based on the projections released in conjunction with the Fed meeting held in December, none of the FOMC member said rate cuts are expected this year. 

According to the FOMC minutes, Fed officials expect interest rate to even stay above 5% in 2023. 

“A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path,” the minutes stated. 

The Fed’s interest rate hike adjustments last year were meant to bring down inflation that have reached highest levels in decades. 

The International Monetary Fund (IMF) said this week that core inflation is expected to decline to 4.4% by the end of this year, from 6.9% in the fourth quarter of 2022. 

However, it warned that inflation could remain “stubbornly high”, citing that continued labour market tightness and growing wage pressures will require tighter monetary policies. 

(Reporting by Cleofe Maceda; editing by Seban Scaria)