Federal Reserve Chairman Jerome Powell hinted that the central bank could keep interest rates unchanged for now, but was careful not to rule out another hike after officials extended a pause in increases.
Unanimous vote
Officials voted unanimously to leave rates unchanged at a 22-year high. "The committee is proceeding cautiously," Powell said during a news conference, where he said nothing to shift market expectations that officials won't raise rates in December.
At the September meeting of Fed officials, most predicted one more rate hike this year, but some have spoken in recent weeks as if they don't want to raise rates again unless they are forced to by worse-than-expected economic data.
Powell echoed this sentiment on Wednesday (1.11.2023) by repeatedly emphasizing how much inflation has fallen, rather than emphasizing the recent strength of the economy.
"If they wanted to hike again this year, Powell would be much more likely to point to the risk that consumer spending will reverse the progress we've seen on inflation," said Diane Swonk, chief economist at KPMG.
Wednesday's Fed decision comes at a tricky time for financial markets, as the 10-year Treasury yield has risen rapidly, by nearly 1 percentage point, since July, when officials last raised rates. They then raised their benchmark federal funds rate to a range between 5.25% and 5.5%.
Followed by a longer period without an increase?
Fed officials have now skipped rate hikes at two consecutive meetings, making this the longest period without a hike since they began raising rates from near zero in March 2022. Since then, they have raised rates at the fastest pace in four decades to combat high inflation.
Powell's comments on Wednesday suggest he expects the Fed's rate hikes, along with the ongoing process of shrinking its $7.9 trillion asset portfolio, will eventually slow the economy, said Michael de Pass, global head of rates trading at Citadel Securities.
Officials are trying to balance two risks. They don't want to overdo rate hikes, lest they cause an unnecessarily sharp decline. They also do not want to allow inflation to accelerate again or to settle at levels well above their 2% target. "Those risks are closer to equilibrium," Powell said. Under pressure whether the Fed would raise rates to a level that would be sufficient to reduce inflation, he said: "We're not sure we didn't, but we're not sure we did.
Rates at a stable level
The big questions for the Fed center on what officials want to see in the economy and what it would take to conclude they are moving in the right or wrong direction. A continued slowdown in inflation could allow them to hold rates steady, while any acceleration in price pressures could lead them to hike again.
Swonk said she thought the Fed would hold rates steady next month because there wouldn't be enough economic data to convince officials to change course. "A Fed pause doesn't equate to a definitive end to rate hikes, but by December they simply won't have the information they need to raise rates," she said.
Mortgages at 23-year highs
The 30-year fixed-rate mortgage has moved closer to 8% in recent weeks at 23-year highs, for example, which has put a damper on home purchases .
Powell said these supply-side improvements could allow inflation to continue to fall even if economic growth is solid, suggesting that stronger growth is not necessarily a problem for the Fed. "We feel like we're on the path to more progress, and it's imperative that we do that," he said.
The extent to which higher borrowing costs slow the economy depends on why they are rising. Yields may rise because investors expect the Fed will have to raise short-term interest rates more to slow inflation, or because they expect inflation to rise. Both have been true for the past two years.
If higher yields tighten financial conditions because investors expect the Fed to raise rates higher, officials would have to follow suit or risk easing financial conditions that would make it harder to reduce inflation.
The central bank has no reason to raise rates
Some former Fed officials argue that the central bank has no reason to raise rates as long as inflation and wage growth continue to slow gradually. "In that case, I don't see any reason for policy to be more restrictive," said Eric Rosengren, former president of the Boston Fed.
But others think the central bank is making a mistake and should err on the side of raising rates next month, as the insurance against growth and inflation will prove more resilient to the Fed's efforts. If the Fed remains on hold in December, there is a danger that the central bank will have to raise rates more than once early next year, Cabana said.