by Howard Schneider
WASHINGTON, Oct 24 (Reuters) – The Federal Reserve (Fed), which is expected to opt for another sharp rate hike at its November meeting, could be heading towards a debate on easing the pace of its monetary tightening.
The U.S. central bank is likely to send a message to that effect following its November 1-2 meeting as some of its members weigh the growing risks to economic growth against the lack of real progress in inflation control.
“This debate about exactly where to go and whether to rely more on data is going to intensify in the latter part of the year,” St. Louis Fed President James Bullard said in a statement. an interview with Reuters ten days ago.
While San Francisco branch president Mary Daly acknowledged on Friday that high inflation made it “very difficult” to pause rate hikes, she said “now is the time to start” debating rates. a slowdown.
Investors widely expect the Fed to raise the federal funds rate target by three-quarters points next week for the fourth consecutive time, taking it to between 3.75% and 4.00%.
Although the monetary tightening cycle is not yet over, officials believe that they may be close to the stage where the rate hikes that will follow may be less significant, in order to take stock of their restrictive policy.
Fed Vice Chair Lael Brainard two weeks ago cataloged reasons to be cautious about monetary tightening, without openly calling for a slowdown or a pause.
Charles Evans, the president of the Chicago Regional Fed, for his part warned of the considerable “non-linear” risks to the economy if the federal funds rate is raised well beyond the level of 4.6% that committee members on average projected to achieve by the end of 2023.
So far, inflation data has offered little cause for relief. The consumer price index rose 8.2% year on year in September and underlying inflationary pressures continued to build.
Employment growth remains strong, with a number of vacancies still too high compared to the number of job seekers.
Yet even some of the more “hawkish” voices of the Fed seem ready to give the economy time to integrate the ongoing monetary tightening.
Inflation, Fed officials acknowledge, has become broader and more persistent than expected, and its decline is likely to be slow.
But they also acknowledge that the full impact of rate hikes may not be clearly felt for months.
For now, vehicle prices, which fueled the inflationary surge at the start of the pandemic, are falling and industry bosses expect the same. Monthly data shows rents are falling and the housing industry is rapidly slowing as the average rate for a 30-year fixed mortgage nears 7%.
The September economic projections, however, show that 17 out of 19 Fed officials believe inflationary risks are on the upside.
So, even if they would be willing to ease off on the magnitude of the rate hike, Fed members will not want it to be seen as a real “pivot” in the institution’s policy or a softening of their stance on inflation.
Even more dovish officials like Charles Evans agree that monetary policy needs to reach a tighter level and stay there until inflation is broken.
Others are of the opinion that even if the Fed slows its rate hikes to half a percentage point as of December, monetary tightening remains rapid by standards and could quickly push the “fed funds” target to 5 % or more.
“How to withdraw without giving observers, financial markets, a bad impression?”, said Charles Evans. “I think it puts the emphasis on explaining where we think we are, what we expect from inflation (..) It’s a tough discussion.”
(Reporting Howard Schneider; with Ann Saphir, French version Laetitia Volga, editing by Kate Entringer)