By Anne Sapphire
(Reuters) – U.S. central bankers unambiguously telegraphed this week’s policy decision: a quarter-percentage-point hike in their benchmark interest rate, the lowest since they launched their tightening 10 months ago with one of the same size.
What is less clear is whether they will continue to signal “continued increases” in the key rate as evidence mounts that inflation and the economy lose momentum.
The Federal Reserve has included this phrase in every policy statement since March 2022, when officials just started raising borrowing costs from zero and wanted to signal that there was a lot more tightening to come.
The increase in rates scheduled for the meeting of the Federal Open Market Committee from January 31 to February 31. 1 meeting would bring the key rate back to the range of 4.5% to 4.75%. That’s two quarter-point rate hikes below the level most Fed policymakers in December thought were “tightly enough” to keep inflation under control.
“Is the word ‘ongoing’ really capturing two more bulls? That’s a close call,” said Karim Basta of III Capital Management.
At the same time, he said, “there is going to be some caution” about anything that could fuel market expectations that a pause in rate hikes is imminent.
This is exactly what financial markets are already predicting: an end to rate hikes in March, with a policy target in the range of 4.75% to 5%, followed by rate cuts from September in the face of what many economists predict easing inflation and a recession. Fed policymakers, at least in December, all see no rate cut until 2024.
“Any signal to the market that they’re about to be done just gives the markets the green light that the next move is a rate cut,” said ING’s chief international economist, James Knightly.
That could loosen the financial conditions the Fed has fought to tighten and potentially ignite more inflation, he said, undermining its efforts to get it under control.
“Why rock the boat? Why risk destabilizing the situation? Knightley said. “The key question is how committed they are to continuing the rate hikes.”
There is no doubt that the Fed’s most intense tightening – evidenced by a series of four consecutive 75 basis point hikes to deal as quickly as possible with inflation reaching 40-year highs – is yielding the make way for something more progressive. But there is still a lot of uncertainty about how much tightening is needed.
Inflation is coming out of the boil. The core personal consumption expenditure price index, which the Fed uses to gauge underlying inflation dynamics, rose 4.4% in December from a year earlier; for the last three months, it averaged 3.2% on an annualized basis. Still, that’s well above the Fed’s 2% target.
The Fed’s aggressive response also appears to have hit US consumers, who as recently as last summer had begun to view rising inflation as a more lasting phenomenon, a worrying development that had been one catalysts for the rapid rise of these inordinate rate hikes. On Friday, data from the University of Michigan showed consumer views on near-term inflation fell to the lowest since April 2021 and longer-term price growth expectations fell from highs. of the last decade.
The economy is starting to slow down but the unemployment rate at 3.5% has not been lower for more than 50 years. Wage growth is much stronger than what Fed officials believe is consistent with stable prices.
Historically, Fed policymakers often signal increased uncertainty and potential turning points with subtle shifts in the language of policy statements aimed at outlining the most likely path without locking them in.
In late 2005, for example, after more than a year of steady interest rate increases, policymakers wanted to “honourably discharge” certain words of seniority in their post-meeting statement, transcripts show, including signaling the likelihood of a “measured” rate. hikes to remove “lodging”.
In January, they agreed “further policy tightening may be needed,” a phrase Fed Chairman Alan Greenspan told fellow policymakers reflected that the Fed had no no more fixed plan but would rather be “largely” guided by the incoming data.
At the end of 2018, Fed policymakers also wanted to show increased reliance on data and relatively limited further tightening. Changing their December statement to say that the committee “deems certain” rather than “expects” “further incremental increases” in the target rate to be consistent with its objectives proved to mark the end of that series of rate hikes.
It’s unclear if either of these changes serve as a template for next week. In recent public comments, Fed policymakers have offered their own descriptions of the trajectory of the rate hike, including “continued monetary policy tightening” from often influential Fed Governor Christopher Waller.
Fed Vice Chairman Lael Brainard and New York Fed Chairman John Williams, who both work closely with Fed Chairman Jerome Powell to draft the official verbiage, did not for their part offered no new direction for rate hikes in recent speeches, although Brainard and Williams stressed that the Fed must “stay the course” on its fight against inflation – a turn of phrase that Powell has also often used. .
And analysts are split on whether the Fed plans to pull back “ongoing” in favor of something less like policy on autopilot but still headed to the upside, as the analysts have suggested. BNP analysts this week.
“It’s a very tricky issue. It’s a tricky language issue, but I think they better not change it,” Nationwide chief economist Kathy Bostjancic says, taking the other side. “They don’t want financial conditions to get significantly easier than they are now.”
(Reporting by Ann Saphir; Editing by Dan Burns and Andrea Ricci)
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