Fed Chief Jerome Powell recently underscored the central bank’s commitment to boosting interest rates enough to lower inflation.
Photo: Manuel Balce Ceneta/Associated Press
The Federal Reserve appears to be on a path to raise interest rates by another 0.75 percentage point this month in the wake of Chairman
public pledge to reduce inflation even if it increases unemployment.
Fed officials have done little to push back against market expectations of a third consecutive 0.75-point rate rise in recent public statements and interviews ahead of their Sept. 20-21 policy meeting.
Investors in interest-rate futures markets saw a roughly 75% probability on Wednesday that the Fed will raise rates by another 0.75 point this month, according to CME Group.
Major U.S. stock indexes closed higher Wednesday, with the Nasdaq Composite ending a seven-session streak of declines. Oil prices fell to their lowest level since before the invasion of Ukraine. Treasury yields also declined, with the benchmark 10-year U.S. Treasury yield closing at 3.264%, from 3.339% on Tuesday.
In a speech Aug. 26 in Jackson Hole, Wyo., Mr. Powell underscored the central bank’s commitment to boosting interest rates enough to lower inflation from 40-year highs. “We will keep at it until we are confident the job is done,” he said.
His remarks and tone placed him among the Fed officials who favor a more aggressive pace of rate increases than others, said
chief U.S. economist at research firm SGH Macro Advisors. Raising rates by 0.75 percentage point would fit that approach, he said.
Mr. Powell’s speech showed he “very much did not want to leave the impression that the Fed would fall short on fighting inflation,” Mr. Duy said.
Fed Vice Chairwoman
a senior policy adviser to Mr. Powell, on Wednesday didn’t express a preference on the size of the next increase, but underscored the need for rates to rise and stay at levels that would slow economic activity. “We are in this for as long as it takes to get inflation down,” she said at a banking conference in New York.
Ms. Brainard explained why officials could expect rate increases to lead inflation to moderate in the coming months. She also stressed how policy makers would eventually need to balance the risks of raising rates too much with the risks of cutting rates too soon after economic growth slows. “At some point in the tightening cycle, the risks will become more two-sided,” she said.
Michael Barr, who was sworn in as the Fed’s vice chairman for bank supervision in July, said Wednesday he viewed the risks of allowing inflation to become entrenched as a greater worry than the risk of raising rates too much. Higher rates could bring “some pain in the economy,” but “it’s far worse…to let inflation continue to be too high,” he said at the Brookings Institution.
Fed officials have raised rates this year at the fastest clip since the early 1980s, taking their benchmark federal-funds rate from near zero in March to a range between 2.25% and 2.5% in July.
They face two main questions heading into their Sept. 20-21 meeting that are likely to determine whether to approve another 0.75-point rate rise: How much higher do they expect to raise rates in coming months, and what steps do they take to get there?
Several officials have signaled a desire to raise the fed-funds rate closer to 4% by year’s end—or about 1.5 percentage point higher than its current level. That could be accomplished in rate increases of various sizes at each of the three remaining Fed meetings this year.
An aggressive approach would point to a 0.75-point rate rise at the coming meeting, followed by smaller increases at the next two, analysts said.
“The argument is you’re going to have to go much further than where policy rates are now, and the risk of overshooting is still fairly low,” said Mr. Duy. “And you would rather try to get a little bit more ahead of the curve rather than risk falling behind further.”
St. Louis Fed President
said in an Aug. 18 interview he was leaning in favor of a 0.75-point rate increase this month to raise the fed-funds rate to around 4% by year’s end. “I don’t really see why you want to drag out interest-rate increases into next year,” he said. “I think you might as well do it relatively quickly.”
Another option would be to raise rates by a half percentage point at each of the remaining meetings this year.
Officials will submit new economic projections at their meeting this month, showing how high they expect to lift the fed-funds rate by year’s end.
Their next steps needed to be guided by “where do we want to see interest rates by the end of the year and into next year,” New York Fed President
said in an interview last week. “If, based on the data, it’s clear that we need to get interest rates significantly higher by the end of the year, then obviously that informs a decision at any given meeting.”
Cleveland Fed President
said Wednesday she believed rates were still providing stimulus to the economy because inflation-adjusted, or real, short-term rates are below zero. Ms. Mester said she expects the fed-funds rate will need to rise somewhat above 4% by early next year and stay at that level.
“We have to get into positive territory for the real rate, and that means we’re going to have to do more work than where we are now,” she said in a webinar hosted by Market News International, a financial news service.
The U.S. labor market has remained strong this year, with employers adding 315,000 jobs in August, a robust gain. While inflation slowed a bit in July, underlying price pressures and wage growth suggest it could run well above the Fed’s 2% target for some time. The Labor Department releases next week its inflation report for August.
Ms. Brainard said Wednesday that while the easing of inflation in July was a welcome development, it would require “several months of low monthly inflation readings to be confident” that inflation was returning to the Fed’s 2% target.
Mr. Powell is set to speak Thursday in a moderated discussion at the Cato Institute, his last scheduled public remarks before the coming Fed meeting.
The Fed is raising rates to combat inflation by slowing the economy through tighter financial conditions—such as higher mortgage rates and bond yields, as well as lower stock prices—which typically curb spending, hiring and investment. Any sustained easing in financial conditions—such as through falling yields and rising stocks—could have the opposite effect, fueling inflation.
Officials have been uncomfortable with how markets rallied—easing financial conditions—following their July 26-27 meeting, when Mr. Powell at a news conference signaled the central bank would at some point slow its rate rises.
The rally risked undoing some of the Fed’s work to slow the economy. The average 30-year fixed mortgage fell to 5.45% in mid-August, down from 5.82% in July, according to the Mortgage Bankers Association.
After that rally, “they are much more aware of the communications challenges they face with markets,” said Jonathan Pingle, chief U.S. economist at UBS. Mortgage rates rose to 5.94% last week, the MBA said on Wednesday.
Officials are trying to convey their expectations that rates will need to stay higher for longer, and “one way to send that message is with a third 0.75-point hike,” said Mr. Duy.
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