MNI: Data Hurdles Seen Between Fed And Rate Hike 'Stepdown'

Federal Reserve officials are considering when to start slowing the pace of rate hikes from 75 basis points per meeting, but Chair Jerome Powell will be reluctant to lock in such an outcome for December at his press conference next week, former Fed officials and a current outside adviser told MNI.

­­The Fed will be conscious that upside surprises to inflation and employment between now and the Dec 13-14 meeting could still necessitate another 75bp hike before the year is out, they noted.

"Jay Powell has some scope for telegraphing a December slowing. But he can only go so far. He's speaking for the committee and he can't get too far ahead of the committee before the December meeting," former Atlanta Fed President Dennis Lockhart said in an interview.

"But even if we see little progress in the inflation data to come, I think he has some room to say that the committee has come very far very fast, and, given the lags of policy on the economy and on inflation, it might make sense to monitor the effects of the actions taken so far. I don't think that would necessarily be viewed as inconsistent with even somewhat discouraging inflation data."

For now Powell is more likely to keep alive the option of a fifth straight 75bp increase despite pressure from some FOMC members and lawmakers to signal a slowdown to 50bps as rates approach their projected peak. Indeed the Fed could have to hike by another 75 bps in December if inflation worsens -- as some former officials believe it will.

OVERDOING IT?

Even so, concern is rising among some Fed officials that the FOMC will overtighten, with rates already in restrictive territory and household spending showing hints of attenuating.

Rate increases have a greater impact today as companies and governments have loaded up on debt this century, former Fed Governor Randal Quarles told MNI, arguing that a stop at 4% would still constrain inflation. Others noted monetary policy acts with unpredictable lags, and simultaneous global tightening will have a greater combined effect on prices. (See MNI INTERVIEW: Reasonable For Fed To Slow Pace Soon - Quarles)

"By the end of the year we’ll see a slowdown in the speed of rate increases" before they stop between 4.5% and 5%, said Michael Weber, academic consultant to the Cleveland Fed and Chicago Booth School professor. Headline inflation is coming down even if core is proving more stubborn. "Policymakers will want to see what the effect of rate increases is on aggregate demand."

DATA COULD DISAPPOINT

But some former Fed officials expressed pessimism that inflation and the labor market will cooperate with FOMC hopes that the end of the tightening cycle could be in sight. Labor market momentum has yet to slow noticeably and inflation is proving tough to quell, former Boston Fed President Eric Rosengren told MNI.

"At some point, the pace of rate increases needs to slow from 75 to 50 to 25 and a pause. I don’t think we have the basis in the macro evidence right now to support that," said David Wilcox, former Fed Board of Governors research director, and now economist with the Peterson Institute for International Economics and Bloomberg Economics.

"The risk is a reduction in the pace of increases would be misinterpreted as them flinching from their campaign to bring inflation under control. That misinterpretation would result in a loosening in financial conditions and set back the effort to slow the momentum in aggregate demand."

The FOMC would need consecutive weaker-than-expected October and November employment reports and signs of easing momentum in core CPI categories to be persuaded a stepdown is warranted, he said. "I don’t think it’s likely to happen between now and December."