As the Federal Reserve concludes its policy meeting this Wednesday, experts anticipate steady interest rates. The caution arises from the Fed’s intentions to avoid repeating past inflationary mistakes.
Luke Tilley, Wilmington Trust’s chief economist, emphasized the Fed’s priority to maintain strict financial conditions, wary of sending dovish signals to the market.
Echoing this sentiment, Evercore ISI’s Krishna Guha believes the Fed aims to remain firm, highlighting a clear possibility for an additional hike. However, this would only happen if inflation or labor market metrics show a concerning trend despite robust economic growth.
Recent data, indicating a potential cooling of inflation, reinforced this stance among Fed officials. Notably, August’s Consumer Price Index (CPI) data revealed a 0.6% increase from the previous month and a 3.7% year-on-year growth. A significant factor was the surge in gas prices. However, the core data (excluding volatile sectors like food and energy) indicates a potential slowdown in inflation.
The Fed’s primary metric for core inflation, the Personal Consumption Expenditures (PCE) Index, reported a 4.2% annual increase in July. Though this was slightly up from June’s 4.1%, it remains below the first half-year’s 4.5%-4.6% range. Analysts largely believe this data doesn’t warrant an immediate rate hike. The overarching aim for the Fed remains to bring core inflation down to 2%.
Following an aggressive series of 11 rate hikes since March 2022, the current rates stand between 5.25% and 5.5%. This series has been the most assertive effort by the bank to counteract inflation since the 1980s.
Wilmer Stith, a bond portfolio manager, speculates a potential rate hike in November. He draws an analogy with the challenging final stretch of cable installation, suggesting that managing inflation might prove equally challenging.
Conversely, Luke Tilley believes the Fed won’t pursue another hike this year, given the trend of receding inflation figures. He predicts a drop in the core PCE inflation measure below the 4% mark in the upcoming months.
Jerome Powell, the Fed Chair, at a recent economic symposium, reaffirmed the cautious approach toward rate hikes while also keeping the option open. He asserted that while inflation has reduced from its peak, it’s still excessively high. The commitment remains to ensure a consistent decline in inflation.
Emphasizing the lingering effects of previous rate hikes, Powell also hinted at a yet-unfelt “significant further drag”. Various Fed officials assert that even without a hike this week, their mission to manage inflation continues. Lorie Logan of the Federal Reserve Bank of Dallas encapsulated this by suggesting that “skipping does not imply stopping”. She hinted at a readiness to take further measures if necessary.
Featured Image -iStock by Camrocker
Author Kristen Moran 
