Since the Fed preferred measure of inflation is more than three times its target of 2%, it is clear what will happen at the central bank’s policy meeting on Tuesday and Wednesday: rates will go up by three-quarters of a percentage point for the fourth time in a row, bringing the target overnight lending rate to a range of 3.75%–4.00%.
This week, U.S. central bankers are likely to keep fighting inflation in high gear while debating when to switch to smaller interest rate hikes to keep the world’s largest economy from going into a tailspin.
Less clear is what will happen next.
After the last meeting in September, Fed Chair Jerome Powell said that “at some point” it will be time to slow the pace of rate hikes and look at how the sharpest rise in borrowing costs in 40 years is affecting the economy.
At the Federal Open Market Committee meeting this week, there will be a lot of talk about setting this point, or at least its limits.
Do price pressures need to let up first in a way that’s clear?
Or is the bar just that inflation can’t get worse, even if it takes a while to get better?
How will the impending recession in Europe, the slowdown in China, and the rising global prices of commodities caused by the war in Ukraine affect the U.S. inflation outlook?
How do you explain the delayed effects of rising U.S. rates, which have a big impact on the housing market but haven’t yet hurt the economy as a whole or made the unemployment rate, which is currently 3.5%, go up?
At the end of the Sept. 20-21 meeting, projections were released that show that most of the Fed’s 19 policymakers expect to be able to slow down rate hikes in December and reach a peak policy rate of 4.50%–4.75% in 2023.
But since that meeting, economic data have been mixed. For example, U.S. inflation is still very high, but there are some signs that household spending and job growth are slowing down.
During that time, Fed policymakers, with the notable exception of Powell, have given different answers about where they stand on a possible slowdown or even stop to rate hikes.
Fed Governor Michelle Bowman, for example, said she would wait to slow the rate of rate hikes until she saw signs that inflation was going down. Neel Kashkari, president of the Minneapolis Fed, said he would be happy if inflation just stopped going up.
It’s not clear if two days of debate will be enough to solve these problems.
“There doesn’t seem to be a consensus on the Committee yet about how big a rate hike in December should be,” economists from Nomura wrote on Friday. This makes it harder for Powell to give guidance.
Economists and others think that the Fed chief will instead talk about the information that is still to come before any decision needs to be made. This includes two more monthly reports on the U.S. job market and, most importantly, new inflation readings.
Barclays economists also wrote on Friday, “There isn’t much reason for the committee to limit its options for December. Even the most dovish members would probably want to know more about how inflation and overtightening risks are changing before signaling a policy turn.”
NEED TO BE CONVINCED
Futures markets predict a halt in rate hikes in December and a Fed policy rate of 4.75-5.0% by early next year. This is a bit higher than what policymakers have said they want to see.
Vincent Reinhart, the chief economist at Dreyfus-Mellon, said, “Everything is set up to do 50 basis points in December.” After that, rates will be raised a bit more until they reach a plateau high enough to put downward pressure on inflation.
Other central banks around the world are giving signs that tightening will happen more slowly. For example, the Bank of Canada switched to a half-percentage-point hike last week, and the European Central Bank took a slightly less hawkish tone when it announced a 75-basis-point rate hike last week.
Reinhart said that Fed policymakers also know that monetary policy tends to go too far.
He said, “You tighten too much, you loosen too much, and you wait too long because you want to be sure.” “And since they know that, they’ll slow down.”
Still, if Powell says anything that makes it sound like he thinks the Fed’s projections from September are old, it could change people’s expectations for a change in December and set the stage for a more aggressive touch.
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