Fed officials lay the groundwork for slowing rate hikes during the busy week of Fedspeak

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

And this time coming during a week in which the biggest Fed news had nothing to do with policy, when the Fed disclosed on Wednesday Fed Chair Jerome Powell had tested positive for COVID-19.

According to the Fed, Powell was experiencing mild symptoms and was working remotely while isolating at home. The disclosure came 13 days before the Fed’s two-day policy meeting, set to begin on Jan. 31.

As for what the Fed’s Feb. 1 announcement might have in store for investors, this past week several Fed officials indicated that they favored slowing down the pace of interest rate hikes, while still continuing to raise and maintain higher interest rates.

Officials are encouraged by signs of slowing inflation, although many point to still high services inflation excluding housing, and are leery of being “head-faked” as Fed Governor Chris Waller put it.

Here’s a roundup of the Fed speech this past week, the last we’ll hear before the Fed’s next policy announcement:

Federal Reserve Vice Chair Lael Brainard

Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis…We are determined to stay the course.

In a speech Thursday at the University of Chicago School of Business, Brainard said while there are encouraging signs inflation has come down, the central bank should stay the course of restrictive monetary policy.

Brainard said she’s encouraged by a recent deceleration in wage growth and price trends in core goods and non-housing services — which she says signals we are not experiencing a 1970s-style wage-price spiral.

When asked what impact unwinding the Fed’s balance sheet is having, Brainard said estimates for the impact are probably 50-75 basis points of tightening.

Federal Reserve Board Governor Lael Brainard testifies before a Senate Banking Committee hearing on her nomination to be vice-chair of the Federal Reserve, on Capitol Hill in Washington, US, January 13, 2022. REUTERS/Elizabeth Frantz

Fed Governor Chris Waller

There appears to be little turbulence ahead, so I currently favor a 25-basis point increase at the FOMC’s next meeting at the end of this month.

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

Waller also cheered the moderation in wage growth but says wages still need to come down more to bring down inflation.

Waller also said the market is more optimistic than the Fed that inflation will come down more rapidly this year, causing the central bank to back off raising rates.

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

Beyond that, we still have a considerable way to go towards our 2 percent inflation goal, and I expect to support the continued tightening of monetary policy.”

Boston Fed President Susan Collins

There is more work to do. I anticipate the need for further rate increases, perhaps at a slower pace, depending on incoming data, before holding rates at a sufficiently restrictive level for some time.

Boston Fed President Susan Collins said Thursday at the Boston Federal Reserve that she expects further rate increases, but at a slower pace, pointing to still high services inflation driven by wage growth.

Collins said she thinks rates – which stand in the range of 4.25-4.5% – will need to be raised to just above 5% before holding them there for some time. Rates are in the restrictive territory and we may be nearing the peak, Collins said, so it makes sense to raise rates at a slower pace and balance the risks of bringing down inflation versus pushing up unemployment materially.

Dallas Fed President Laurie Logan

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

Speaking in Austin, Texas Wednesday night, Dallas Fed President Lorie Logan said she wants to slow the pace of rate hikes to make sure the Fed walks the tightrope of reining in inflation while not sinking the economy. Logan said she’s watching financial conditions and says if they loosen, the Fed could always raise rates further—even after pausing.

“That’s why I supported the FOMC’s decision last month to reduce the pace of rate increases,” Logan said. “And the same considerations suggest slowing the pace further at the upcoming meeting.”

Lorie Logan, president and CEO of the Federal Reserve Bank of Dallas, attends a dinner program at Grand Teton National Park where financial leaders from around the world are gathering for the Jackson Hole Economic Symposium outside Jackson, Wyoming, US, August 25, 2022. REUTERS/Jim Urquhart

Lorie Logan, president and CEO of the Federal Reserve Bank of Dallas, attends a dinner program at Grand Teton National Park where financial leaders from around the world are gathering for the Jackson Hole Economic Symposium outside Jackson, Wyoming, US, August 25, 2022. REUTERS/Jim Urquhart

Philadelphia Fed President Patrick Harker

I expect that we will raise rates a few more times this year, although, to my mind, the days of us raising them 75 basis points at a time have surely passed. In my view, hikes of 25 basis points will be appropriate going forward.

Philadelphia Fed President Patrick Harker, speaking in Delaware and New Jersey this week, also said he favored slowing down the pace of rate hikes and that at some point this year, he expects the policy rate will be restrictive enough to hold rates in place and let Monetary policy does its work.

Harker said shrinking the Fed’s balance sheet is also removing a significant amount of accommodation.

St. Louis Fed President James Bullard

Why not go to where we’re supposed to go?…Why stall?

St Louis Fed President James Bullard broke from the pack this week when he reiterated to the Wall Street Journal Fed officials should boost the Fed funds rate above 5% as “quickly as we can” before pausing rate hikes to bring down inflation.

Asked if he was open to another half-point rate increase at the Fed’s upcoming meeting, Bullard responded: “Why not go to where we’re supposed to go?… Why stall?”

St.  Louis Federal Reserve Bank President James Bullard speaks at a public lecture in Singapore October 8, 2018. REUTERS/Edgar Su

St. Louis Federal Reserve Bank President James Bullard speaks at a public lecture in Singapore October 8, 2018. REUTERS/Edgar Su

Looking ahead, officials are focused on the employment cost index for December, out at the end of the month, for more signs wage growth is slowing down.

Fed projections from December showed officials expect to raise rates to just above 5% this year from the current range between 4.25% and 4.5%.

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