The Fed is expected to extend the pause in rate hikes further, but they are reluctant to concede a victory in the fight against inflation, and the next meeting may focus on how long a rate hike is still possible.
After the release of the PCE data on Thursday, Nick Timiraroos, a well-known journalist known as the "new Fed news agency", wrote that the Fed** is increasingly confident that they do not need to continue raising interest rates to curb inflation. But they are not yet satisfied enough to be willing to declare the end of rate hikes, let alone start talking about cutting them.
This means that the Fed is expected to keep interest rates steady at its December meeting, while maintaining its previous public guidance that the next rate adjustment is more likely to be a rate hike than a rate cut. In July, the Federal Reserve raised its benchmark interest rate to 525% to 55% range, followed by two consecutive policy meetings to keep rates unchanged.
New York Fed President Williams said at a meeting on Thursday that monetary policy is at its most restrictive level for the economy in 25 years and needs to remain tight "for quite some time." Speaking to reporters after his speech, he said, "We need to continue to observe and assess how things are going." ”
Months of weak inflation data have led to bets that the Federal Reserve will cut interest rates in May or sooner. But they're not ready to support such an idea. They want to see more evidence that monthly inflation data is still subdued, or that economic and job growth has slowed more than they expected.
This means the Fed's meeting on December 12-13, will focus on how long a rate hike is still likely to be signaled。It is unlikely that this so-called tightening bias will be eliminated at this meeting, which will be a necessary step before considering whether to cut rates.
If inflation picks up again, I think there should be more options for raising interest rates. Richmond Fed President Barkin said this week.
Williams also shrugged off questions on Thursday about when a rate cut might occur, calling it a hypothetical and "something that's going to be a long time to come." He added, "I don't lose sleep because of how the market has changed their perspective".
They are cautious for a number of reasons. They don't want to rush to declare the "mission done" to fight inflation, even if they are encouraged by the recent economic slowdown. The experience of the past three years has taught them that the economy and inflation** are very tricky
There is no reason to prematurely declare victory in the fight against inflation. There is even less reason to do so when the economy continues to expand and does not seem to be affected by anything," said Jonathan Pingle, chief U.S. economist at UBS.
In 2021, inflation spiked in the spring and then initially eased in the summer of that year, leading the Fed to believe that inflation would be short-lived and maintained the ultra-loose monetary policy that was in place at the onset of the pandemic. Eventually, inflation spiked out of control, forcing the Fed to make a sudden policy shift.
As a result, we now want to see more evidence that inflation will not stabilize above 3%, which is unacceptably high for a central bank that has set a 2% target.
In addition,The Fed** also does not want to encourage markets that could stimulate economic activity by announcing the end of rate hikes**。While the economy is still growing at ease, they are particularly keen to avoid pushing investors to price in more rate cuts than the Fed expects.
Still, investors' interest rate cut expectations have been heating up after the October CPI report showed that pressures have generally cooled since June. Core PCE, excluding volatile food and energy projects, grew at an annualized rate of 25%, down from 4 in the previous 6 months5%。
These weak inflation reports have also led to the start of a "relent" by some of the Fed's most aggressive rate hikes over the past 20 months, preferring to keep rates at current levels. Fed Governor Waller said this week that he is "increasingly convinced that current policy is in a good position." In the Q&A session that followed, Waller even said that the Fed might cut interest rates if the current modest inflation data persisted into next spring, which sparked investors' expectations of a rate cut next year.
It's not about trying to save the economy," he said, and if "we believe that inflation is really coming down, and it's coming down, then we can start lowering the policy rate because inflation is lower." ”
Karim Basta, chief economist at III Capital Management, said Waller's rationale for why the Fed can cut rates without a recession is not a big revelation, but his willingness to set a clear time frame for rate cuts is surprising.