Federal Reserve Board Chairman Jerome Powell speaks during a news conference following the closed two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, Nov. 2, 2022.
Elizabeth Frantz | Reuters
The Federal Reserve is expected to raise interest rates by a small half-percentage point on Wednesday, but signals that its battle with inflation is far from over.
The central bank is set to release new forecasts for interest rates and the economy when it wraps up its two-day meeting on Wednesday afternoon. After four straight three-quarter percentage point hikes, central bank officials have signaled that they will reduce the size of rate hikes.
Fed officials may take some comfort from the latest data on inflation, but they won’t show it. November Consumer Price Index, released On Tuesday, inflation showed signs of cooling, albeit at a still higher 7.1% annual pace. This was lower than the 7.7% rate in October Economists expected 7.3%.
“I don’t think they can take any more hits on inflation. I think they’ll be very careful before they do that,” said Aneta Markowska, chief financial economist at Jefferies. Earlier this year, he said, inflation seemed to have peaked. “It looked like it was over and it roared back.”
Economists say the improved inflation report could make Fed Chairman Jerome Powell sound more hawkish when he speaks to reporters at 2:30pm on Wednesday.
“This adds to the argument to moderate the pace of tightening,” said David Page, head of macroeconomic research at AXA Investment Managers. “The Fed has been saying for some time that they want to slow the rate of tightening. … This gives them some cover and some reason.”
But Page said the improved inflation data could make Powell’s job even more difficult.
“We’re already seeing easing in bond yields on the specter that the Fed is going to pull back very quickly,” Page said. “That doesn’t help the Fed manage the short-term run. … More markets will move, and it means the Fed will have to work harder to convince the markets to do what it needs to do.”
Economists say a key part of the Fed’s forecast will be new information on what officials see as the terminal rate, or high water mark, for fed funds next spring. Central bank officials are expected to raise their forecast to 5% — or slightly higher — from 4.6%. The Fed funds target rate is currently between 3.75% and 4%.
Markowska also sees the Fed changing the language in its policy statement to reflect that it is nearing the end of its rate hike cycle. Currently, the report said, “Continued increases in the target range would be appropriate” to achieve its inflation target of 2% over time.
“‘Ongoing’ seems too open-ended. We’re so close to the end that they can’t use that word. They might replace it with something more limited,” Markowska said. “They may say ‘some more’ rate hikes would be appropriate.”
Markowska said that when the report is released at 2pm ET, it will be viewed as negative by markets. “But if he sounds hawkish there will be some whiplash at the press conference,” he said.
“I think the most interesting thing will be the press conference,” said Rick Ryder, BlackRock’s chief investment officer of global fixed income. “I think we’ve heard two different sentiments from the chair between the recent press conference and Brookings.”
Ryder said he was surprised when Powell suggested the Fed could overreach, meaning raise interest rates too high. But then the president spoke at the Brookings Institution on November 30.
“In Brookings, he didn’t want to go there,” Ryder said. After those comments, the stock market rallied on the perception that Powell was too bad.
“So I think the key is the tone of how far they have to go,” Ryder said.