In their upcoming meeting, Jerome Powell and the Federal Reserve members are expected to steer clear of signaling a pause in interest rate hikes.
With ongoing inflation surpassing the 2 percent target and a resilient economy, the US central bank will likely maintain its preference for a tighter policy stance while keeping rates unchanged during the September 19-20 meeting.
Bruce Kasman, who serves as JPMorgan Chase & Co.’s chief economist, holds a confident perspective that the Federal Reserve won’t provide any hints of a conclusion at this juncture.
Diverging monetary policy of ECB amidst sluggish phase
This situation starkly contrasts the relatively ambiguous messaging seen from the European Central Bank (ECB). It increases the quarter-point rate on Thursday, September 14.
Following the meeting, ECB President Christine Lagarde briefed reporters, stating that the eurozone was currently in the midst of an “exceptionally sluggish phase of economic expansion.”
In a calculated move, President Lagarde abstained from confirming whether interest rates had reached their peak. Investors, analyzing the post-meeting policy statement, perceived it as a potential indicator of European policymakers’ conclusion of rate hikes.
This deliberate uncertainty in Lagarde’s stance has left the financial markets in a state of anticipation, contemplating the future trajectory of European monetary policy.
The euro witnessed a decline, while bond prices experienced a surge, reflecting tempered anticipation of another rate hike by the ECB. Investors honed in on a significant comment where the bank expressed its belief that the ECB’s key interest rates have potentially reached their pinnacle.
FED aims to balance inflation and growth amidst rate uncertainty
ECB’s characterization contrasts the sentiment Powell expressed during the Fed’s Jackson Hole conference on August 25. He emphasized that US policymakers remained watchful for any signs of unexpected economic strength.
Powell stressed the need to balance demand and supply while addressing the conference, focusing on controlling inflation. Following the meeting, projections indicate significant upward revisions in US growth forecasts for this year.
Futures contracts linked to the Federal Reserve’s policy rate, which settles on Wednesdays, now signal growing confidence. Despite a report indicating accelerated inflation in August, these contracts initially experienced losses.
However, traders soon adjusted their expectations, leading to a rebound. They suggest a roughly 60% probability that the Fed will maintain its policy rate within the 5.25%-5.5% range established in July for the remainder of the year. This shift from a more balanced probability before the report indicates reduced expectations of further rate hikes.
Fed’s perspectives on future rate hikes and Inflation
According to Derek Tang, an economist at LH Meyer/Monetary Policy Analytics, Powell may find limited advantages in decisively concluding rate hikes. Tang recommends that Powell should emphasize the possibility of future rate increases, especially given the absence of an expected hike in September.
Bruce Kasman from JPMorgan points out that the forthcoming dot plot from the Fed might unveil the median policymaker’s outlook, shedding more light on their expectations.
During their prior forecast round in June, Federal Reserve officials collectively projected a one percent growth rate for the economy in 2023.
This anticipation hints at the possibility of a rate hike later in the year, with the November or December meetings emerging as viable options. Kasman proposed that Powell’s post-meeting press conference could provide a nuanced viewpoint, emphasizing the Fed’s efforts to combat inflation.
Powell keeps the possibility open for a hike
Lagarde indicated that policymakers may focus on evaluating how long elevated rates will persist. Notably, she clarified that this shift in focus does not imply a certainty regarding attaining a rate peak.
Chicago Fed President Austan Goolsbee echoed this sentiment, emphasizing that the discussion will soon pivot away from deliberating the extent of rate increases. Goolsbee shared his perspective on September 7, noting that the debate is on the brink of shifting toward topics beyond the size of rate hikes.
Analysts predict that Powell’s messaging in the upcoming week will be more restrained than Lagarde’s recent statements.
Diane Swonk highlighted the divergence in their messaging: Lagarde sought a pause through rate hikes, while Powell seeks to avoid raising rates again but keeps the possibility open.