Wall Street analysts will focus Wednesday on what Federal Reserve Chairman Jerome Powell says about whether the central bank may slow interest rate hikes at its next policy meeting in December.
Fed officials have already indicated they are likely to raise their benchmark federal-funds rate by 0.75 percentage points this week to a range between 3.75% and 4%. That would mark their fourth consecutive increase of that size as they seek to reduce inflation by slowing the economy. Some of the officials have just started to signal their desire to start reducing the size of the increase after this week and possibly stop lifting rates early next year so they can see the impact of their actions.
Those officials and many private sector economists have warned of growing risks that the Fed will raise rates and trigger an unnecessarily sharp slowdown. As of June, the Fed had not raised interest rates by 0.75 point, or 75 basis points, since 1994.
“They need to think about the calibration of this meeting. You’re trying to cool down an economy, not throw it into a deep freeze,” said Diane Swonk, chief economist at KPMG.
Fed officials have widely supported a supersize rate hike this summer because they are playing catch-up. Inflation is running near 40-year highs, but interest rates are pinned near zero through March. Debate on how much more rate hikes may accelerate as they reach levels more likely to stifle spending, hiring and investment. The fed-funds rate influences other borrowing costs throughout the economy, including rates on credit cards, mortgages and auto loans.
“They need to slow down. Let’s remember, 50 basis points is fast; 75 basis points is very fast,” said Ellen Meade, an economist at Duke University who is a former senior adviser to the Fed.
December is a natural time to slow the pace of rate hikes because officials may use new projections at that meeting to show they expect to reach a higher peak or terminal rate. interest rate than they previously expected, he said. The debate over the speed of the increases may obscure a more important one about how rates will ultimately rise. “Going faster now is about raising the terminal rate,” said Ms. Meade.
But some analysts say it will be difficult for the Fed to dial back the pace of rate hikes in December because they expect inflation to continue to be hotter than other analysts forecast. Fed officials expect inflation to decline this year, but that outlook has so far come to nothing. They responded by targeting a higher target for the fed-funds rate than they had planned earlier in the year, resulting in a longer-than-expected string of 0.75-point rate hikes.
Officials at their meeting in September projected that they would need to raise the rate to at least 4.6% early next year. “If you have broad agreement on that and inflation continues to come in higher than expected, it makes sense to get the highest rate as soon as possible,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. .
Analysts at Deutsche Bank, UBS, Credit Suisse and Nomura Securities expect the Fed to follow a 0.75-point rate hike this week with an increase of the same size in December.
Meanwhile, analysts at Bank of America, Goldman Sachs, Morgan Stanley, and Evercore ISI see the Fed dialing back the pace of rate hikes in December with a 0.5-point increase.
Economic data released since the Fed’s September meeting has been mixed. While domestic demand has slowed and the housing market has entered a sharp decline, the job market remains strong and inflationary pressures remain high. Recent earnings reports show strong consumer demand and rising prices.
Officials will see two more months of economic reports before their meeting in mid-December, including hiring and inflation. “Although Powell gave guidance in his press conference, it did not include a commitment. That’s because the decision should be determined by the data,” wrote former Fed governor Laurence Meyer, who runs the company in economic forecaster LH Meyer Inc., in a recent report.
Some economists say the Fed should raise the fed-funds rate higher than 4.6% next year due to strength in consumer spending and domestic demand for higher interest rates. currently.
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FHN Financial strategists expect the Fed to raise its policy rate to around 6% next June. After this week’s hike, the Fed could do that without another rate hike of 0.75 points.
“The obvious problem for the financial markets is that many things can be real at the same time, and many of them are pulling in different directions. The Fed may slow down in December, but still reach 6% in our forecast, ” said Jim Vogel of FHN Financial, in a note to clients on Monday.
The Fed fights inflation by slowing the economy through tighter financial conditions—such as higher borrowing costs, lower stock prices and a stronger dollar—that curb demand. Changes in the expected trajectory of rates, and not just what the Fed does at any meeting, can influence the broader financial situation.
Many investors this year have been eager to interpret signs of a less aggressive pace of rate hikes as a sign that a pause in rate hikes is not far away, but rather a continued market rally that risk losing the Fed’s job in slowing the economy.
Any discussion by Mr. Powell about how officials view the potential for a higher rate path could dampen any market excitement about a slower rate hike, economists say. “It’s now about the destination, not the journey,” said Michael Gapen, chief US economist at Bank of America, in a report Monday.
Write to Nick Timiraos at [email protected]
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