In their policy meeting this Wednesday, Federal Reserve officials are anticipated to maintain current interest rates, according to assessments by economists and analysts. However, indications suggest that they will keep the possibility of at least one more hike on the table.
Wilmington Trust’s Chief Economist, Luke Tilley, emphasized the Fed’s cautious approach, stating, “They are being very risk averse, and they’re still worried about making the mistake of the 1970s of letting inflation go back up.” Tilley underscored the Fed’s commitment to keeping financial conditions tight and preventing any signals of dovishness from affecting the market.
Evercore ISI Analyst Krishna Guha added that the Fed is likely to adopt a firm stance, asserting the option for a further hike, but will exercise caution, only considering it if progress on inflation or the labor market shows signs of stalling amid robust economic growth.
Federal Reserve officials reinforced this probable stance through a series of comments in late August and early September, signaling their readiness to pause on a new hike this month while they analyze data indicating a moderation in inflation.
Economists note that nothing in the past week, during the “quiet period” leading up to the policy meeting, suggests a deviation from this projected course.
A pivotal moment came last Wednesday with the release of the Consumer Price Index (CPI) data for August, revealing a 0.6% rise from the previous month and a 3.7% increase over the prior year. This marked an acceleration from July’s 0.2% monthly uptick and 3.2% annual price surge.
However, a closer examination of the data highlights signs of disinflation. The headline price increase in August was primarily propelled by a surge in gas prices. When excluding the volatile food and energy categories, prices in August only rose by 4.3%, indicating a deceleration from July’s 4.7% increase.
The Fed’s preferred core inflation metric, the Personal Consumption Expenditures (PCE) Index, which excludes food and energy costs, recorded a 4.2% rise over the prior year in July. While this represented an increase from June’s 4.1%, it remains below the range of 4.5%-4.6% observed in the first half of the year.
Economists generally interpret the data as insufficient to prompt a rate hike at the upcoming policy meeting. The Fed’s ultimate goal is to bring down the core inflation figure to 2%.
At present, interest rates stand in the range of 5.25%-5.5%, following a series of 11 hikes since March 2022, marking the most aggressive move by the Federal Reserve to combat inflation since the 1980s.
In June, officials initially projected two more rate hikes for the year, but subsequently withdrew one in July. This leaves the possibility of one more rate hike on the table. Investors anticipate an update to interest rate projections this week, with expectations for one additional hike to be included, along with no alterations to rate cuts for the following year.
Bond Portfolio Manager Wilmer Stith believes that there is still room for one more rate hike in November, given current growth trends. However, Wilmington Trust’s Luke Tilley contends that the Fed is unlikely to raise interest rates again this year, citing a trend of cooler inflation data and an anticipation of a slowdown in the Fed’s preferred inflation metric.
Federal Reserve Chair Jerome Powell, speaking at the Kansas City Fed’s annual economic symposium, stated that the Fed is poised to proceed cautiously and is prepared to raise rates further if necessary. Powell acknowledged potential lag effects from prior rate hikes, suggesting there may be a significant further drag yet to be experienced.
While some Fed officials have indicated that a rate hike this week may not be imminent, they emphasize that this doesn’t signify an end to potential future adjustments. Federal Reserve Bank of Dallas President Lorie Logan stated, “Another skip could be appropriate when we meet later this month. 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.”
Source: Yahoo Finance
