Federal Reserve officials have centered on plans to raise interest rates by 0.4 percentage points next month as policymakers grow increasingly concerned about the durability of rapid inflation.
The Fed faces two big options at its next meeting, which could force the Fed to hike rates at least slightly higher next year than previously expected.
The central bank had hoped to discuss the slowdown at its November meeting, but the labor market remains strong and the recent surge in data suggesting inflation is relentless has forced the central bank to settle on a smaller scale. We are poised to postpone any serious discussion of any possible move for at least a month. Discussions on whether to downsize were more likely in December. Investors have fully priced in his 3-point move in his fourth consecutive quarter at his Fed meeting on Nov. I’m not trying to change.
Officials may also feel the need to push interest rates higher than expected in recent September as inflation remains stubborn even in the face of major moves to curb it. . The central bank has set the highest interest rate for next year, he said, at 4.6%, but that could rise slightly depending on future data. Interest rates are currently set at around 3.1%, and the Fed’s next forecast he expects to be released in December.
Fed officials have been steadily more aggressive in their fight against inflation this year as the price surge sweeping the world has proven more persistent than nearly everyone expected. . Even after the exclusion of food and fuel prices, CPI prices rose 6.6% in his year to September, according to last week’s report. I saw the core index.
“It’s a bit difficult to slow down without a clear reason,” said former Fed Vice Chairman Alan Blinder, now at Princeton University.
Blinder expects the Fed to make another big move at its upcoming meeting. “If you were Jay Powell and the Federal Reserve and you slowed down to 50, what would you say?” he said. “I can’t say we’ve seen inflation progress. That would be laughed out of court.”
Policymakers entered the year with hopes of barely raising interest rates in 2022. predict They would end the year near zero to less than 1%. rice field.
Officials fear that if rapid inflation is allowed to linger, it could become a permanent feature of the U.S. economy. Workers are likely to demand larger wage increases each year if they think their costs will rise steadily. Companies anticipate higher wages and are confident that consumers will not be shocked by higher prices, so they are likely to raise their bills more significantly and more regularly.
“The longer the current high inflation lasts, the more likely inflation expectations will take hold,” said Fed Chairman Powell. warned him press conference last month.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So your dollar won’t go as well tomorrow as it did today. It is usually expressed as annual changes in the prices of commodities and services such as food, furniture, apparel, transportation and toys.
A growing body of data suggests that inflation today is no longer the result of temporary trends that are likely to fade away on their own over time. Supply chains are recovering and shipping costs have reversed, but consumer prices continue to rise rapidly month over month. These increases are driven by a wide range of goods and services, including rising housing costs, pet care services and dental visits.
their latest minutesofficials acknowledged that “inflation has been declining more slowly than previously expected” and that price pressures “had persisted across a wide range of product categories”.Inflation has deepened since then. It’s just showing signs of measures against inflation Anything that tries to denoise the data is unusually solid.
Also, so far there is little evidence that Fed policy is trying to keep prices down. The Fed’s move will take time to show up, but its impact is already pretty clear in the overall economic data. The housing market has slowed sharply, demand has started to recede, and people are eating away at their savings. But prices have barely responded to these trends.
Fed President Christopher Waller said, “We have yet to make meaningful progress on inflation.” recent speech.
If that continues, Fed officials could be forced to do more to curb rate hikes next year. James Bullard, president of the Federal Reserve Bank of St. Louis and voter on policy this year, said: interview with Reuters Last week, he could back another big 0.4 percentage point rate hike in December, raising the policy rate to around 4.6%, with more to come next year.
Bullard said it was “very likely” that the Fed would “raise the policy rate” based on further data. He said price hikes could start to wane, but could be put on hold.
Minneapolis Federal Reserve Bank Governor Neil Kashkari said: at the event on Tuesday Without real progress in lowering core inflation, he said he could not understand why. Stop The interest rate next year is 4.5 or 4.75%.
“I’m not even sure if the problem is getting worse. At least until I have that confidence, I’m not ready to declare a moratorium,” he said.
Citi’s global chief economist Nathan Sheets expects Fed officials to slow rate hikes in line with the latest economic forecasts. 2023 for him before the suspension. But he said there was a notable risk of raising interest rates further.
“The Fed has a hard time explaining why it’s determined to fight inflation, even if it hikes rates by less than three-quarters,” Sheets said.
Central banks don’t want investors to believe that their commitment to fighting inflation is starting to falter. If market players think so, it could ease financial conditions, make credit cheaper and more accessible, and serve a different purpose than the Fed’s goals. This came after Powell’s July press conference, when he hinted that rate hikes could soon slow down and investors began falsely expecting an imminent withdrawal from the central bank. I was.
“When he opened the door, the market was like, ‘Ahaha! The Federal Reserve is pivoting,'” Sheets said. “So far, it’s been a tricky message.”
Of course, there are several reasons to expect inflation to change. This would be a more obvious reason for the Fed to slow down.
Understanding Inflation and How It Affects You
Used car prices have fallen at wholesale levels, which could start to be reflected more in consumer prices. Retailers are announcing discounts as their inventory builds up. Firms that continue to make unusually high profits by charging more than they cost to produce their goods and services slash their profit guidance As consumers begin to retreat.
There are also some early signs that the labor market is returning to a more normal state. Job openings began to decline average hourly wage showing signs of easing.
But hiring has persisted at an unusually fast pace, with the Fed stocking more quarterly wage and benefits compensation measures – labor cost index — continues to rise rapidly. Pressure on service prices may continue as restaurants and health care providers try to cover rising labor costs, and higher wages could help sustain consumer spending.
At the same time, new problems can arise. For example, gas prices rose again this month and their future trajectory is uncertain.
Recent history offers many reasons to be careful. For his 18 months, the Fed has hoped that inflation will subside soon, but that hope has been dashed time and time again by reality.
But with the outlook so uncertain, officials have stressed in recent speeches that policy decisions will be made on a meeting-by-meeting basis, and will decide in December if a fifth big rate hike is appropriate. Part of the reason is that it is too early to do so.
“The outlook for inflation and economic activity is subject to unusual uncertainty,” said Fed President Michelle Bowman. said in a speech last week. “We must continue to reiterate that we are ‘very careful about inflation risk.’ This is probably the best and clearest guidance we can offer at this time.”