Federal Reserve officials will deliver their next policy statement and interest rate decision on Wednesday, with current estimates placing the probability of a rate increase at a negligible 1%, despite a surprise uptick in consumer prices in both July and August.
Although the probability of a rate pause in September remains low, Fed officials have penciled in room for at least one more rate increase by the end of the year. This would leave the policy meetings in November and December as the last two opportunities for the Fed to raise rates in 2023.
As is tradition, Fed Chair Jerome Powell will hold a press conference at 2:30 p.m. to elaborate on the Federal Open Market Committee’s (FOMC) interest rate decision.
The Fed has to remain “risk averse” to avoid a 1970s-style resurgence in inflation, said Luke Tilley, Wilmington Trust’s chief economist.
“They don’t want the market to take any kind of signal of dovishness and run with it. They need to keep financial conditions tight,” he said, Yahoo Finance reported.
During his last press conference, Powell conceded that while inflation has decreased from its 9.1% peak, it still “remains too high.”
“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” Powell said during an August 25 speech in Jackson Hole, Wyoming.
So far, the U.S. Central Bank has carried out its most aggressive rate cycle in more than four decades, having approved 11 rate increases since March 2022. The increases have brought the Fed’s benchmark rate from near-zero to a current range of 5.25-5.50%.
“We want to see economic growth running at moderate or modest levels to help ease inflationary pressures,” Powell told reporters during an FOMC press conference in July. “… [But] what our eyes are telling us is that policy has not been restrictive … enough for long enough to have its full desired effects. … We still think the process has a long way to go.”
Despite the low probability of a September rate hike, Wilmer Stith, senior fixed income portfolio manager at M&T Bank, sees at least one more rate increase in 2023.
“Realistically, just looking at growth in and of itself suggests that we are going to get one more hike this year,” said Stith, per Yahoo Finance.
“I think [the data] still paint the picture of the last mile — getting the cable of a wire from the cable line to your home is the most arduous part of getting cable to your house,” said Stith. “I think that’s going to be the same thing with inflation.”
Although a rate pause is the most likely scenario, it does not mean Fed officials are through raising rates, according to Dallas Fed President Lorie Logan.
“Another skip could be appropriate when we meet later this month. But skipping does not imply stopping,” Logan remarked in a speech given to the Dallas Business Club on September 7.
“In coming months, further evaluation of the data and outlook could confirm that we need to do more to extinguish inflation,” she said. “The FOMC will need to keep the water bucket close at hand, and we must not hesitate to use it as necessary.”
Consumer Price Index data for September is scheduled for release on October 12.