A few months ago, Fed Chair Jerome Powell compared hiking up rates to fight inflation to riding a car. “Now we’re moderating that pace, much as you might do if you were to be driving 75 miles an hour on a highway, then 50 miles an hour on a local highway, then as you get closer to your destination, you try to find that destination — you slow down even further,” he said. Now, the car has stopped. Powell is looking at the map because it’s not clear to him whether he’s arrived, but he doesn’t want to overshoot too far either. For the second meeting in a row, and as expected, the Federal Reserve has decided to keep interest rates in the 5.25%-5.5% range, the highest in 22 years, while also keeping the door open for a future hike.
The problem is that the indications on the map are not clear. The economy grew in the third quarter at the fastest pace since 2021 and inflation remains clearly above the 2% target, but all economists expect a significant slowdown. Job creation accelerated by surprise in September, but the latest labor market data point to a cooling. Long-term interest rates have been set at their highest since the Great Recession, tightening monetary conditions, but the war between Israel and Hamas raises supply-side inflation risks. As Powell also said, the uncertainties are so great that it is time to navigate “by the stars under cloudy skies.”
As it waits for the sky to clear up, the Federal Reserve is giving mixed signals. It is holding rates steady, but it is also prepared to raise them again if necessary. In September, the members of the central bank’s monetary policy committee themselves were forecasting an additional 0.25-point hike before the end of the year, but the decision on whether to meet their own prediction will be made in December. And if the rate hike doesn’t come in December, that wouldn’t rule out the possibility that there could be one in the first quarter of the following year, Powell explained at the press conference following Wednesday’s Fed meeting. “The idea that it would be difficult to raise again after stopping for a meeting or two isn’t right,” he said.
“Given the uncertainties and risks, and how far we have come, the committee is proceeding carefully,” Powell said, adding that the central bank will continue to make decisions on a meeting-by-meeting basis.
Powell is aware that he must be meticulous. If he falls short, inflation could become entrenched. If he overshoots, it may trigger an unnecessary recession, ruining the long-awaited soft landing; a term that, as Alan Greenspan recalled in his memoirs, is drawn from the U.S.-Soviet space race in the 1970s. In fact, Fed economists removed a possible recession from their macroeconomic scenario a few months ago and have not reintroduced it for the time being, Powell explained.
The central bank’s latest statement introduces only two minor tweaks to the September one, to emphasize the strength of the economy and to mention the tightening of financial conditions. As Powell explained at the press conference, by this he is not only referring to the rise in long-term interest rates, but also to other factors such as the fall in the stock market and the strength of the dollar.
Those factors can alter “the path of monetary policy,” he said, that is, they can prevent a rise in the official Fed funds rate. However, Powell stressed that it remains to be seen how persistent these variables are and what their effect is. “We will keep policy restrictive until we are confident that inflation is on a sustainable path down to 2%,” he insisted. “We’re not confident yet we have achieved such a stance.”
The monetary policy committee continues to avoid tying its hands in the future. It has declared itself data-dependent and, as Powell reiterated this Wednesday, “is acting cautiously.” “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information,” Powell said, pointing in particular to “readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
During the press conference, Powell has acknowledged, faced with a question about the Israel-Hamas war, that political issues are relevant. “Our job is to monitor that for its economic implications,” he replied.
Powell was also asked if the committee had begun discussing when it would start lowering the rates. “The committee is not thinking about rate cuts at all,” he replied. The Fed Chair has argued on several occasions that more important than how high they go is how long they stay high. The market has internalized that this is going to be longer than it thought a few months ago, but it is still trying to figure out whether we are in a pause or whether the rate hike cycle has come to an end. That is, whether the car has finally reached its destination.
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