Fed officials are setting the stage for slowing rate hikes during the busy week of Fedspeak


As always, the last week before the quiet period before the Federal Reserve’s next policy meeting was one for Fedwatchers looking for clues about the central bank’s next move.

And this time, the biggest Fed news comes in a week that has nothing to do with politics, when the Fed announced on Wednesday that Fed Chairman Jerome Powell had tested positive for COVID-19.

According to the feds, Powell was experiencing mild symptoms and was working remotely while isolating at home. The announcement came 13 days before the Fed’s two-day policy meeting, which begins on January 31.

As for what investors can expect from the Fed’s Feb. 1 announcement, several Fed officials this past week indicated their preference for slowing the pace of rate hikes, while continuing to raise and maintain interest rates higher.

Officials are encouraged by signs that inflation is slowing, though many point to inflation still high for services excluding housing, and are wary of becoming a “false-in-chief,” as Fed Governor Chris Waller called it.

Here’s the last speech we’ll hear before the Fed’s next policy announcement last week:

Federal Reserve Vice Chairman Lael Brainard

Even with the recent moderation, inflation remains high and policy will need to be quite restrictive for some time to ensure that inflation returns to 2 percent sustainably… We are determined to stay the course.

In a speech at the University of Chicago Business School on Thursday, Brainard said that while there are encouraging signs that inflation is coming down, the central bank should continue on a tight monetary policy course.

Brainard said he was encouraged by the recent slowdown in wage growth and price trends in basic goods and non-housing services — suggesting we are not experiencing the wage-price spiral of the 1970s.

Asked what impact the Fed’s balance sheet unwinding would have, Brainard said estimates for the impact were probably 50 to 75 basis points of tightening.

Federal Reserve Board Governor Lael Brainard testifies before a Senate Banking Committee hearing on his nomination to serve as vice chairman of the U.S. Federal Reserve on Capitol Hill January 13, 2022 in Washington, D.C. REUTERS/Elizabeth Frantz

Fed Governor Chris Waller

There is some turbulence ahead, so I am currently in favor of a 25 basis point hike at the next FOMC meeting later this month.

Speaking at the Council on Foreign Relations on Friday, Fed Governor Chris Waller said he was encouraged by the December CPI report, but noted that inflation, measured on a monthly basis, was in March when the Fed began raising interest rates, and yet the measure has largely been sideways all year. .

Waller also welcomed the moderation in wage growth, but said wages still need to fall more to keep inflation down.

Waller also said the market is more optimistic than the Fed, that inflation will fall more quickly this year, prompting the central bank to pull back on rate hikes.

Waller said it would be great if that happened, but the Fed needs to manage the risk that inflation won’t pull back. For these reasons, Waller continues to raise rates, but at a slower pace.

“In addition, we still have a long way to go to reach our 2 percent inflation target, and I expect to support continued monetary policy tightening.”

Boston Fed President Susan Collins

There is more work to be done. I expect that further increases will be needed, perhaps at a slower pace, depending on incoming data, before I keep rates fairly restrictive for some time.

Boston Fed President Susan Collins said Thursday at the Boston Federal Reserve that she expects further interest rate hikes, but at a slower pace, pointing to higher service inflation driven by wage growth.

Collins said he thought rates would have to be raised to a little above 5% before keeping them in the 4.25-4.5% range for a while. Rates are in containment territory and we may be nearing the top, Collins said, so it makes sense to raise rates at a slower pace and balance the risks of lowering inflation with significantly increasing unemployment.

Dallas Fed President Lori Logan

To be clear, I don’t see the argument for a slower pace as being too dependent on the latest data… A slower pace is just a way to ensure we make the best decisions possible.

Speaking in Austin, Texas, on Tuesday, Dallas Fed President Lori Logan said the Fed wants to slow the pace of interest rate hikes to make sure it walks the tightrope of reining in inflation without collapsing the economy. Logan said he was watching financial conditions and said the Fed could always raise rates further if they loosen — even after the break.

“That’s why I supported the FOMC’s decision to cut interest rates last month,” Logan said. “And the same considerations suggest a further slowing of the pace in the upcoming meeting.”

Lori Logan, president and CEO of the Federal Reserve Bank of Dallas, attends a dinner at Grand Teton National Park, where financial leaders from around the world gather for the Jackson Hole Economic Symposium, near Jackson, Wyoming, U.S., August 25, 2022.  REUTERS/Jim Urquhart

Lori Logan, president and CEO of the Federal Reserve Bank of Dallas, attends a dinner at Grand Teton National Park, where financial leaders from around the world gather for the Jackson Hole Economic Symposium, near Jackson, Wyoming, U.S., August 25, 2022. REUTERS/Jim Urquhart

Philadelphia Fed President Patrick Harker

I expect that we will raise rates several times this year, although in my view, the days of raising them to 75 basis points at a time are definitely gone. In my view, a 25 basis point hike would be appropriate going forward.

Philadelphia Fed President Patrick Harker, speaking in Delaware and New Jersey this week, also said he favors slowing the pace of rate hikes and expects the policy rate to be restrictive enough at some point this year to keep rates in place and allow for more interest rate hikes. monetary policy is doing its job.

Shrinking the Fed’s balance sheet has also eliminated a significant amount of leverage, Harker said.

Louis Fed President James Bullard

Why not go where we need to go?…Why the stall?

St. Louis Fed President James Bullard broke with the pack this week when he reiterated to the Wall Street Journal that Fed officials must raise the Fed funds rate above 5% “as soon as we can” before stopping rate hikes to bring down inflation.

Asked if he was open to another half-point rate hike at the Fed’s upcoming meeting, Bullard replied: “Why not go where we need to go? . . . Why stop?”

James Bullard, president of the Federal Reserve Bank of St. Louis, speaks during a public lecture in Singapore on October 8, 2018.  REUTERS/Edgar Su

James Bullard, president of the Federal Reserve Bank of St. Louis, speaks during a public lecture in Singapore on October 8, 2018. REUTERS/Edgar Su

Looking ahead, officials are eyeing December’s employment costs index at the end of the month for more signs that wage growth is slowing.

Fed forecasts from December showed officials expected to raise interest rates to slightly above 5% this year, from the current range of 4.25% to 4.5%.

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