September 18, 2023
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Federal Reserve officials are likely to hold interest rates steady when they conclude their policy meeting this Wednesday
Federal Reserve officials are likely to hold interest rates steady when they conclude their policy meeting this Wednesday, economists and analysts said, but they are also expected to keep the door open for at least one more hike.
"They are being very risk averse, and they're still worried about making the mistake of the 1970s of letting inflation go back up," said Wilmington Trust chief economist Luke Tilley. "They don't want the market to take any kind of signal of dovishness and run with it. They need to keep financial conditions tight."
The Fed, added Evercore ISI analyst Krishna Guha, "will strike a stern, resolute tone, assert a serious option of a further hike and a high bar for future cuts — but will not exercise the option to hike again unless progress on inflation or the labor market stalls out amid stronger growth."
Fed officials reinforced this likely stance in a series of comments in late August and the first week of September, indicating they were prepared to pause on a new hike this month as they take more time to digest data that suggests inflation is cooling.
Nothing happened this past week — as Fed officials entered the "quiet period" that precedes a policy meeting — to suggest otherwise, according to economists.
One key moment came last Wednesday with the release of data showing the Consumer Price Index (CPI) rose 0.6% over last month and 3.7% over the prior year in August. That was an acceleration from July's 0.2% monthly increase and 3.2% annual gain in prices.
But a closer look at the data also suggested some signs of disinflation. Gas prices largely drove the headline price increase in August. On a core basis, which strips out the volatile food and energy categories, prices in August rose 4.3%, a slowdown from the 4.7% increase seen in July.
The Fed's preferred core inflation measure — the Personal Consumption Expenditures (PCE) Index that excludes the cost of food and energy — rose 4.2% over the prior year in July. While that was up from 4.1% in June, it is still down from the range of 4.5%-4.6% for the first half of the year.
Economists largely read the data as not a big enough outlier to prompt the Fed to raise rates at its policy meeting on Tuesday and Wednesday. The Fed’s goal is to eventually push that core inflation figure down to 2%.
Rates now stand in the range of 5.25%-5.5%, following 11 hikes since March 2022 that represent the most aggressive action from the central bank to tackle inflation since the 1980s.
In June, officials penciled in two more rate hikes for the year, pulling one of those rate hikes in July, leaving potentially one more rate hike on the table. Interest rate projections will be updated this week and investors expect one more rate hike to be penciled in and no changes to rate cuts for next year.
Wilmer Stith, a bond portfolio manager, said he thinks the Fed could still go one last time in November.
“Realistically, just looking at growth in and of itself suggests that we are going to get one more hike this year,” Stith said.
“I think [the data] still paint the picture of the last mile — getting the cable of a wire from the cable line to your home is the most arduous part of getting cable to your house. I think that's going to be the same thing with inflation,” he added.
But Tilley, the Wilmington Trust chief economist, says the Fed will not end up raising rates again this year given the trend of cooler inflation data and his expectations for the Fed’s preferred inflation gauge to slow further.
Accounting for base effects in the next two inflation reports before the Fed’s November meeting, Tilley thinks inflation — as measured by core PCE — should drop below 4%, compared with 4.2% in July.
Fed Chair Jerome Powell said at the Kansas City Fed's annual economic symposium in Jackson Hole, Wyo., on Aug. 25 that the Fed is "in a position to proceed carefully" as it mulls future actions, while also leaving rate hikes squarely on the table.
"Although inflation has moved down from its peak — a welcome development — it remains too high," he said. "We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective."
Powell has also acknowledged lag effects of previous rate hikes, noting that there may be “significant further drag” that’s yet to be felt.
Some Fed officials have been clear that even if the central bank doesn’t raise rates this week, it doesn’t mean they’re finished.
"Another skip could be appropriate when we meet later this month," Federal Reserve Bank of Dallas president Lorie Logan said in a speech Sept. 7 before the Dallas Business Club.
"But skipping does not imply stopping. In coming months, further evaluation of the data and outlook could confirm that we need to do more to extinguish inflation."
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