Fed interest rate hikes are nearing their conclusion. Now, the focus of the discussion is transitioning from determining the necessary level of interest rates to deciding the duration for which they should be maintained at current levels.
Inflationary pressures ease, allowing policymakers to keep rates steady. However, policymakers are cautious due to high price gains. The talks on prolonged steady rates counter the rate cut expectations, maintaining downward economic pressure. Officials are considering extended rate stability amid slowing inflation, aiming to avoid premature economic easing.
According to Brian Sack, a former Fed official, the primary focus ahead is on duration, not on Fed interest rate hikes.
The duration of keeping the federal funds rate is critical. However, the scope remains for tightening financial conditions if required.
Last month, Federal Reserve officials raised the benchmark rate to 5.25% – 5.5%, a 22-year high. Upcoming minutes may reveal whether policymakers believe that the Fed interest rate hikes have already taken effect entirely or if they anticipate further impact.
Recent data suggests that inflation is aligning with the policymakers’ intended direction. In July, the core consumer price index, excluding volatile costs, saw modest 0.2% increases for two consecutive months, the smallest in over two years. Additionally, consumer expectations for year-ahead inflation unexpectedly decreased in early August, reaching a low not seen for over two years.
Diverse Views on Further Fed Interest Rate Hikes
Policymakers hold divergent views on their next steps. Certain officials are minimizing the importance of a potential additional rate hike, emphasizing their intention to maintain rates at restrictive levels as the key point.
Some, like Philadelphia Fed President Patrick Harker, advocate maintaining rates for an extended period, while others, including Fed Governor Michelle Bowman, argue for further rate hikes.
Minneapolis Fed President Neel Kashkari stated on Tuesday that he is not ready to conclude that rate hikes are finished, but he’s observing positive indications that suggest a more gradual approach might be taken to gather additional data before making further decisions.
New York Fed President John Williams expressed this month that the peak rate might be close, and the focus lies on determining how long a restrictive policy stance is needed once that point is clarified.
Goldman Sachs Group Inc. economists, including Jan Hatzius and David Mericle, predict the Federal Reserve will initiate interest rate reductions by the end of next June, gradually implementing quarterly decreases from that juncture.
Expectations for September – Will Fed Hold Rates?
Reports of consistent job gains and a strong economy reduce recession risks but could reignite inflation. Based on futures, market expectations suggest no more Fed interest rate hikes in September, with around a one-third chance of a hike in November. Officials delay limiting options until inflation data signals a definite reduction in price pressures.
Officials are yet to clarify rate stability duration, possibly due to uncertainty, according to Tim Duy of SGH Macro Advisors. This month, policymakers might address this issue during the Kansas City Fed’s Jackson Hole symposium. The ongoing conversations among presidents and Fed speakers mirror the anticipated discussions at Jackson Hole.
Tim Duy highlights the evolving dialogue among officials and its connection to Jackson Hole’s upcoming discourse. Conversations among Fed presidents now foreshadow Jackson Hole’s probable sideline discussions, as noted by Duy. This marks a transition into the subsequent phase of the unfolding narrative, according to Duy.
Ellen Meade Tells Fed Chair Is Cautious
Powell might not entirely rule out another increase. Ellen Meade, an economics professor at Duke University and former senior Fed staff member, suggests he’s cautious.
However, officials are now informally discussing the duration of elevated rates, preparing to weigh trade-offs. Once a consensus forms on halting hikes, Powell will collaborate on crafting the policy statement language, Meade explained.
Anticipating future Fed rate hikes or inflation considerations, officials engage in these conversations today to be prepared for tomorrow, according to Meade.
Forecasts For 2024
In June, the median economic projections highlighted that most Fed officials anticipated further Fed interest rate hikes besides the one approved in July. These forecasts also indicated a prediction for rates to be reduced to 4.6% by the end of 2024, yet the exact timing of these cuts remains uncertain.
A Bloomberg survey conducted from July 13 to 18, involving 45 economists, revealed a division of opinions regarding the timing of the first rate cut after all these Fed interest rate hikes. Over one-quarter of participants forecasted a reduction in January 2024. However, the median view of the group places the first cut in the subsequent March meeting, with rates potentially reaching 4.75% by June 2024.