Federal Reserve Anticipated to Slow Pace of Tightening: Potential Impact on Economy and Interest Rates

The decision-making body of the Federal Reserve is largely anticipated to increase its core rate by 25 basis points today, signaling a slower pace of tightening by the central bank. Future actions are still a subject of speculation, but insights into Fed Chair Jerome Powell’s thought process could be gleaned from last month’s FOMC press briefing and may emerge again at today’s conference, scheduled for 2:30 PM ET.

Powell’s Remarks in Retrospect

In June, Powell touched upon the widely held belief that monetary policy impacts the economy with “long and variable lags.” Notably, financial conditions often begin to tighten prior to actual rate hikes. This was apparent when the conversation of ‘lifting off’ started, which resulted in the two-year interest rate – a reliable prediction of future monetary policy – skyrocketing from 20 to 200 basis points. Consequently, in today’s rapidly moving world where news disseminates quickly, tightening happens much earlier than it did in the past.

Immediate and Gradual Effects of Monetary Policy

Powell further elucidated that while interest-sensitive spending – on housing and durable goods, for instance – reacts almost immediately, wider demand, spending, asset values, and so on take a longer time to respond. The profession lacks a definitive consensus about how long these responses take, which provides additional justification for a somewhat more moderate pace.

Market Reaction and Projections

Markets will be attentively monitoring any shifts in this viewpoint today, as each utterance from Powell carries significant weight. Futures trading predicts that the Fed will halt rate increases after this meeting. The CME FedWatch Tool indicates a 55.6% chance that the federal funds rate range will stay constant at 5.25%-5.50% for the rest of the year. There’s a 31.9% probability that the FOMC will hike by another 25 basis points, with some investors anticipating a rate rise to 5.75%-6.00% – a scenario assigned a 4.8% likelihood. However, the median FOMC ‘dot plot’ forecast predicts the rate will reach 5.6% by the end of the year.

Expert Commentary

Seeking Alpha analyst Christopher Robb reads the data as an indication of remarkable resilience in the U.S. consumer and economy, hinting at a likely soft landing and signifying the probable conclusion of a harsh Fed rate-hiking cycle. Offering a differing perspective, Logan Kane points out that one reason for the Fed’s continued rate increases is to avoid the “stop and go” policy errors from the 1970s and early 1980s. These saw inflation surge in waves, the Fed easing off after each wave, only to witness inflation returning with a vengeance.