Federal Reserve officials have said they may raise the central bank’s benchmark interest rate from its current 22-year high – but financial market participants largely don’t believe them.
Federal Reserve Chairman Jerome Powell was among several Fed officials who spoke on Thursday, stressing that the Fed had merely paused – not ended – its campaign of anti-inflation rate hikes when it held rates steady at its latest meeting last week. The Fed could squeeze inflation and the economy harder with more rate hikes if inflation doesn’t fall toward the Fed’s goal of a 2% annual rate, Powell and others said.
Market participants are closely watching every statement from Fed officials for clues about the next move in monetary policy. On Thursday, as the market digested the latest comments, the S&P 500 Index fell 0.8%, snapping an eight-session winning streak for stocks, while Treasury yields rose.
However, traders were still pricing in only a 15% chance that the Fed will raise rates next month, according to the CME Group’s FedWatch tool, which forecasts rate hikes based on Fed futures trading data.
While up from 10% on Wednesday, the priced-in probability is down from 20% a week ago. Traders are pricing in a 23.5% chance of a hike in January.
With inflation already on a downward trajectory this year, some economists expect it to simmer down without further help from the Fed, especially as wage growth has slowed recently and rents and house prices are no longer soaring as they did during the financial crisis. But Powell struck a hawkish tone.
“We know that continued progress toward our 2% objective is not assured: Inflation has given us some headwinds,” Powell said at an International Monetary Fund conference in Washington. “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”
Since the Fed’s campaign began, inflation has cooled significantly, reaching an annual rate of 3.7% in September, down from a peak of 9.1% in June as measured by the Consumer Price Index. But with inflation still well above target, members of the Federal Open Market Committee, which decides on interest rate moves, aren’t ready to declare victory and are waiting to see what future inflation reports say before making another move.
“While I continue to expect that we will need to raise the federal funds rate further to bring inflation down to our 2% objective in a timely manner, I supported the FOMC’s decision last week to hold the target range for the federal funds rate at its current level while we continue to assess incoming information and its implications for the outlook,” Fed Governor Michelle Bowman said in a speech to bankers in Florida, according to prepared remarks.
Kathleen O’Neill Paese, interim president of the Federal Reserve Bank of St. Louis, said she favoured a wait-and-see approach while remaining ready to raise rates again if necessary.
“We can afford to wait for more data before concluding that additional policy tightening is appropriate,” she said in a speech to financial professionals in Indiana, according to prepared remarks. “However, if progress toward achieving 2 percent inflation stalls, I believe the committee should act promptly to ensure that high inflation does not become entrenched.”
Patrick Harker, president of the Federal Reserve Bank of Philadelphia, argued for holding rates steady to gauge the impact of high interest rates on the economy.
“This economy is proving to be resilient and at times unwilling to bend to the will of economic models, but I believe the path we are on is the right one,” he said in a speech at Northwestern University. “I’m not going to be easily swayed by one month’s worth of data.”
