The Federal Reserve, staring at two big options, charts an aggressive course

Federal Reserve officials gathered around a plan to raise interest rates by three-quarters of a point next month as policymakers grow increasingly concerned about the continued strength of rapid rate increases – and increasingly concerned that inflation is now feeding on itself.

Such concerns may also prompt the Fed to raise interest rates at least next year a little higher than previously expected as officials face two big choices at their upcoming meetings: when to slow down rapid rate increases and when to stop them altogether.

Central bankers were Expected to discuss The slowdown at their meeting in November, but a slew of recent data indicating that the labor market remains strong and inflation is unrelenting, has them preparing to postpone a serious discussion of a smaller move for at least a month. The conversation about downsizing is now likely to occur in December. Investors fully priced in the fourth straight move of three-quarters of a point at the Fed’s November 1-2 meeting, and officials made no effort to change that forecast.

Officials may also feel the need to push interest rates higher than they most recently expected in September, as inflation remains elusive even in the face of big moves to try to control it. While the central bank is starting at a peak rate of 4.6 percent next year, that could rise depending on the incoming data. Prices are now set around 3.1%, and the Fed’s next forecast will be released in December.

Federal Reserve officials have become steadily fiercer in their fight against inflation this year, as the price explosion sweeping the world has proven more steadfast than anyone expected. And at the moment, they have no good reason to give up: last week’s report showed that CPI prices It rose 6.6 percent in the year to September even after removing food and fuel prices — a new 40-year high for this closely watched core indicator.

“It’s a bit hard to slow down for no apparent reason,” said Alan Blinder, a former Fed vice president now at Princeton University.

Mr. Blinder expects the Fed to make another big move at the next meeting. “If you were Jay Powell and the Fed and slowed to 50, what would you say?” He said. They can’t say we’ve seen progress on inflation. It will be ridiculed out of court.”

Policymakers came into the year hardly expecting a rate hike in 2022, anticipation That they would close the year below 1 percent, up from about zero. But with inflation steadily rising and then recovering to near the fastest pace since the early 1980s, they are becoming more determined to stamp it out, even if it will cost the economy in the near term.

Officials fear that if they allow rapid inflation, it will become a permanent feature of the American economy. Workers may demand larger wage increases each year if they believe costs will increase steadily. Companies, anticipating higher wage bills and feeling confident that consumers will not be shocked by price increases, may increase their fees more and more regularly.

“The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will be entrenched,” said Mr. Powell, Fed Chairman, caution in the face Press conference last month.

There are increasing signs in the data that inflation today is lower and lower as a result of one-off trends that are likely to fizzle out on their own over time. Supply chains are recovering, freight costs that have jumped have fallen, but consumer prices continue to rise rapidly month after month. Those increases Led by a wide range of goods and services, including climbing housing costs, pet care services, and dental visits.

in their own Latest meeting minutes, officials acknowledged that “inflation was falling more slowly than they had previously expected” and that price pressures “persisted across a wide range of product categories.” Since then, inflation has only shown signs of deepening: even inflation measures that is trying to remove noise in the data is unusually static.

And there is little evidence, so far, that Fed policy is curbing rate increases. The Fed’s moves take time to wind up, but their effects are already evident in the overall economic data: the housing market slows sharply, demand begins to fall and people are eating up their savings. However, prices have shown little reaction to those trends.

“We haven’t made significant progress on inflation yet,” said Christopher Waller, Federal Reserve Governor, during this period. modern speech.

If that continues, it could force Fed officials to do more next year to constrain interest rate increases. James Bullard, St. Louis Federal Reserve Bank President and this year’s policy voter, noted Interview with Reuters Last week, he might favor another big three-quarter-point rate hike in December – with the rate raised to around 4.6 per cent – and then take further steps next year.

Mr Pollard said it was “quite likely” that the incoming data could push officials “a higher rate of policy”. It’s also possible, he said, that the price increases could start to fade, allowing for a pause.

Nathan Sheets, Citi’s chief global economist, expects Fed officials to slow their rate increases in line with their latest economic forecast: a move of three-quarters of a point in November, a half-point in December and a quarter of a point early. 2023 before stopping. But he said there was a notable risk that they would end up raising interest rates further.

“The Fed has struggled to make it clear that even if it rises less than three-quarters of a point, it remains determined to fight inflation,” Sheets said.

The central bank doesn’t want investors to think that its dedication to fighting inflation is starting to crack. If market players believe that financial conditions may recede, making credit cheaper and more available and working for purposes contrary to the Fed’s goals. It happened after Powell’s press conference in July, when the president hinted that interest rate increases may soon slow and investors incorrectly began to anticipate an imminent decline of the central bank.

‘When he opened the door for her,’ said the marketplace, ‘Aha!’ said Mr. Sheets. ‘It has been a difficult message thus far.’

Of course, there are some reasons to hope that the inflation picture will change, which would give the Fed a more obvious reason to slow down.

Used car prices fall at the wholesale level, and this can begin to feed into full-blown consumer prices. retailers Announcing discounts With the accumulation of stocks. Companies that are still operating Unusually high profits They are expected to be able to charge more than the cost of their goods and services for production Reducing their profit directing When consumers start to back off.

There are also some nascent signs that the job market is calming down and returning to something more normal. Job opportunities began to decline, and Average hourly earnings They showed signs of moderation.

But hiring has continued at an extraordinarily fast pace, and a quarterly measure of wages and benefits compensation the Federal Reserve is putting into even greater stock – Labor Cost Index – Keep going up quickly. That can put pressure on service prices, as restaurants and health care providers try to cover rising labor bills, and higher wages can help consumers keep spending.

At the same time, new problems may arise: gas prices have risen again this month, for example, and their future course is uncertain.

Recent history offers many reasons for caution. The Fed spent 18 months hoping that inflation would subside soon, only to have that prediction smashed over and over again by reality.

But with a highly uncertain outlook, officials have emphasized in recent speeches that policy will take place on a meeting-by-meeting basis – one reason it’s too early to say whether a fifth big rate move in December will be appropriate.

“Inflation expectations and economic activity are subject to unusual uncertainty,” Michael Bowman, Federal Reserve Governor, He said in a letter last week. “We must continue to stress that we will remain ‘extremely attentive to inflation risks.’ This is perhaps the best and clearest forward guidance we can provide at this point.”