This week, U.S. central bankers are anticipated to maintain their focus on fighting inflation while escalating the discussion of whether to switch to modest interest rate hikes to prevent the collapse of the world’s largest economy.
The Fed will raise levels by three-quarters of a percentage point for the upcoming fourth consecutive meeting, putting the target overnight lending rate in a range between 3.75% and 4.00%. The Fed’s preferred measure of inflation is currently running at much more than 3 times its 2% target.
But the following step is less certain.
After the most recent meeting, in September, Fed Chairman Jerome Powell stated that it will “at some time” be prudent to reduce the pace of rate hikes and evaluate how the economy is being affected by the biggest increase in borrowing costs in 40 years.
At this week’s Fed Open Market Committee meeting, there will be a lot of talk about defining that threshold or at least its limitations.
Does a convincing easing of inflationary pressure need to come first?
Or does the benchmark just state that inflation must cease growing worse, even if improvement eventually occurs?
How will the impending European recession, China’s slowdown, and the escalating global commodity prices fueled by the conflict in Ukraine affect the prospects for inflation in the United States?
How can the substantial slowdown in the housing market, which is not yet having an impact on the rest of the economy or raising the unemployment rate, which is currently at 3.5%, be explained?
The majority of the Fed’s Nineteen policymakers appear to anticipate being able to start slowing rate increases in December and reaching a peak policy rate of 4.50%–4.75% in 2023, according to projections made public following the meeting on September 20–21.
Although the U.S. inflation rate is still scorchingly high, there are some indicators that consumer spending and employment growth are slowing down since that meeting, according to the economic data.
And in that period, Fed decision-makers—with Powell standing out—have presented a variety of perspectives on where they stood on a potential slowdown or even pause in rate hikes.
For instance, Fed Governor Michelle Bowman stated that she would wait for indications that inflation is declining before deciding to slow the rate of rate increases. Neel Kashkari, president of the Minneapolis Fed, indicated he would be content if inflation actually stopped increasing.
It’s debatable if two days of discussion will be sufficient to end such disagreements.
Analysts at Nomura believed there does not currently appear to be agreement among the Committee regarding the preferred magnitude of a December raise, which limits Powell’s capacity to provide advice.
These analysts and others believe that the Fed president would instead highlight the wealth of information still to be released before any decisions need to be taken, including two additional monthly reports on the status of the U.S. labour market and, most critically, brand-new inflation measurements.
Even the most dovish individuals would probably prefer additional information on how inflation and overtightening concerns are unfolding before signalling a policy reversal, Barclays economists also wrote on Friday. As a result, there is no incentive for the committee to limit its optionality for December.
The odds in the futures market strongly favour a halt in rate increases beginning in December, but eventually a target Fed policy-rate of 4.75%–5.00%, just a little higher than what policymakers have indicated, by early 2019.
Vincent Reinhart said the chief economist at renowned Dreyfus-Mellon, everything is set up for rates to increase by 50 basis points in December and then gradually increase until they reach a plateau high enough to reduce inflation.
With the Bank of Canada switching to a half-point increase last week and the European Central Bank adopting a little less aggressive stance as it unveiled its own 75-basis-point rate increase last week, other global central banks are indicating that future tightening will be more gradual.
Reinhart said that Fed members are also conscious of the fact that monetary policy frequently veers off course.
According to him, when people are very constricted, they loosen up too much and wait too long since they need to be persuaded. And because of that, they’ll slow down.
However, anything Powell says that shows he thinks the Fed’s September predictions are outdated may derail plans for a downshift in December and pave the way for a more active touch.
