Federal Reserve officials are expected to keep interest rates steady for a second consecutive time next month, but they are far from done tightening policy.
In recent days, both hawkish and dovish policymakers have signaled their preference to abandon raising interest rates between October 31 and November 31. The first meeting came after rising bond yields tightened financial conditions.
However, according to labor market data and inflation With the economy still booming, the FOMC is unlikely to write off the possibility of further rate hikes.
“It’s too early to declare victory,” Minneapolis Fed President Neel Kashkari, who has voted on rates this year, said at a town hall event in North Dakota on Tuesday.
Every minute The Federal Reserve’s September meeting, released on Wednesday, showed policymakers identified a range of risks that could push up inflation, including food price shocks, a strengthening housing market and a slowdown in commodity price declines. An expected ground war between Israel and Hamas could also lead to continued increases in energy prices, exacerbating inflationary pressures.
Although the Federal Reserve has raised interest rates by more than 5 percentage points since March 2022, recent economic data has also highlighted the resilience of the economy.
Hiring surged last month, with employers adding 336,000 jobs, double economists’ estimates and the most since the start of the year. Producer prices rose more than expected, and core inflation excluding housing and energy services, a measure closely watched by Chairman Jerome Powell, also rose.
Priya Misra, a portfolio manager at J.P. Morgan Investment Management in New York, said recurring “head fraud” in economic data will make policymakers cautious about signaling an end to further tightening.
“Whenever they’re done, I don’t think they’re going to say they’re done,” Misra said. “They want to keep the expectation or option of raising rates open.”
Fed officials are increasingly focused on balancing the risk of overshooting – and triggering a possible recession – with the need to get inflation back to target. They are also worried about making the same mistake as the Bank of Canada, which had to restart interest rate hikes after a conditional pause in June, citing “excess demand” that was more persistent than expected.
San Francisco Fed President Mary Daly called this the most difficult phase of policymaking as officials try to communicate how they address bilateral risks.
“It’s actually not a good idea to communicate one thing or another when you don’t know exactly what’s needed,” she said on Oct. 5. “We may find that the data we have is really accelerating, And I don’t think we want to be in a position where we’ve made it clear we’re not going to do X and then need X.”
Production surges
Still, a rapid rise in bond yields after the Sept. 19-20 policy meeting led some officials to conclude they could skip raising rates for a second consecutive meeting because higher market rates were exerting some disincentive. effect.
Vice Chairman Philip Jefferson, who plays a key role in communicating Fed policy on behalf of Powell, said on Monday that he was watching rising Treasury yields as it could further depress the economy.
“Going forward, I will continue to recognize that rising bond yields will lead to tighter financial conditions and keep this in mind when assessing the path of future policy,” he said.
The U.S. 10-year Treasury yield hit its highest level since 2007 on October 6 and later closed at 4.8%. As Fed officials signaled there might not be a rate hike in November, yields fell back, ending the week at 4.61%.
“We’re in a position where we’re going to watch and see what happens,” Fed Governor Christopher Waller said Wednesday at a meeting in Park City, Utah.
Others, including Philadelphia Fed President Patrick Harker and Atlanta Fed President Raphael Bostic, went further, saying policy would be restrictive enough to steer inflation back to the central bank’s 2% target. .
But such a clear signal is unlikely to come from the Fed’s policy committee.
In forecasts submitted last month, 12 of 19 officials said they expected another rate hike before the end of the year.
While policymakers may at some point adjust their post-meeting statement – which mentioned “the extent of additional policy tightening” – the data doesn’t yet suggest the war on inflation is over.
The latest reading from the Fed’s preferred core inflation measure showed prices rose 3.9% in the 12 months through August.
Communicate risks
A strong signal that the rate-raising cycle is over could lead to a strong rebound in stock and bond markets, sparking more consumption and economic growth as Fed officials try to curb demand.
Households seem to believe that the fight against inflation is far from convincingly won.Short-term and long-term inflation expectations go higher This month, a University of Michigan survey showed on Friday.
“They can’t signal that they’re done,” said Lou Crandall, chief economist at Wrightson ICAP LLC, because that would immediately trigger expectations of when the Fed will start cutting interest rates.
Fed officials also believe it is critical to control inflation expectations and have repeatedly emphasized their commitment to restoring price stability, even if it means raising interest rates higher than they currently anticipate.
“2% is and will remain our inflation target,” Powell said in a speech at a central bank symposium in Jackson Hole, Wyoming, on August 25.
The Fed chairman is scheduled to speak at the Economic Club of New York on Thursday.
Removing the threat of further interest rate hikes could also damage public credibility, increasing the risk of entrenched inflation.
“The risk that they need to take more action is very high,” said Andrew Levin, a former senior adviser to the Federal Reserve and now a professor at Dartmouth College.
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