Fed officials are laying the groundwork for a slowdown in rate hikes during a busy week of Fedspeak

As always, the past week ahead of the Fed’s lull ahead of the next policy meeting, was a busy week for Fed watchers looking for clues about the central bank’s next move.

And this time comes during a week when the Fed’s biggest news had little to do with politics, when the Fed revealed on Wednesday that Federal Reserve Chair Jerome Powell had tested positive for COVID-19.

According to the Fed, Powell had mild symptoms and was working remotely while he was isolated at home. The disclosure came 13 days before the two-day federal policy meeting, which is scheduled to begin on January 31.

As for what the Fed might have in store on February 1st for investors, several Fed officials indicated last week that they favor a slow pace of rate hikes, while continuing to raise and sustain interest rates.

Officials are encouraged by signs of slowing inflation, although many point to continuing to pick up inflation in services excluding housing, and worry that it is “fake” Fed Governor Chris Waller said.

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

Federal Reserve Vice Chairman Lyle 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% on a sustainable basis… We are determined to stay the course.

In a speech Thursday at the University of Chicago Business School, Brainard said that while there are encouraging signs of abating inflation, the central bank should continue on the path of restrictive monetary policy.

Brainard said she’s encouraged by the recent slowdown in wage growth and price trends in non-residential goods and services — which she says suggests we’re not experiencing a 1970s-style spiral.

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

Federal Reserve Governor Lyle Brainard testifies before the Senate Banking Committee hearing regarding her nomination to be Vice Chair of the Federal Reserve, on Capitol Hill in Washington, US, on January 13, 2022. REUTERS/Elizabeth Frantz

Federal Reserve Governor Lyle Brainard testifies before the Senate Banking Committee hearing regarding her nomination to be Vice Chair of the Federal Reserve, on Capitol Hill in Washington, US, on January 13, 2022. REUTERS/Elizabeth Frantz

Federal Reserve Governor Chris Waller

There seems to be a bit of turbulence ahead, so I currently favor a 25 basis point hike at the next FOMC meeting at the end of this month.

Speaking at the Council on Foreign Relations on Friday, Fed Governor Chris Waller said he was encouraged by the December CPI report, but noted that, measured on a monthly basis, inflation was at the level it was in March when it began. The Federal Reserve has continued to raise interest rates and so the measure has basically moved sideways throughout the year.

Waller also welcomed the moderation in wage growth, but said wages still need to fall further to bring down inflation.

Waller also said the market is more optimistic than the Fed that inflation will fall more quickly this year, prompting the central bank to back off from raising interest rates.

It would be great if that happened, Waller said, but the Fed needs to manage the risk of inflation not subsiding. For these reasons, Waller favors continuing to raise interest rates, but at a slower pace.

Furthermore, we still have a long way to go to achieve the 2 percent inflation target, and I expect to support continued tightening of monetary policy.”

Boston Federal Reserve Chair Susan Collins

There is more work to do. I anticipate the need for more rate increases, perhaps at a slower pace, depending on the data coming in, before rates are held at a sufficiently restrained level for some time.

Boston Federal Reserve Chair Susan Collins said Thursday at the Boston Federal Reserve that she expects more rate increases, but at a slower pace, noting continued high service inflation driven by wage growth.

Collins said she believes rates — which lie in the 4.25-4.5% range — will need to be raised to just over 5% before being held for some time. Prices are in restricted territory and we may be nearing a peak, Collins said, so it makes sense to raise prices at a slower pace and balance the risks of lowering inflation against pushing unemployment higher materially.

Dallas Federal Reserve Chairman Lori Logan

To be clear, I don’t see the argument for a slower pace relying too much on the latest data…a slower pace is just a way to ensure that the best possible decisions are made.

Speaking in Austin, Texas, on Wednesday night, Dallas Fed President Lori Logan said she wants to slow the pace of rate hikes to make sure the Fed walks a tightrope to rein in inflation while not flooding the economy. Logan said she monitors financial conditions and says that if they ease, the Fed can always raise interest rates further — even after a pause.

“This is why I supported the FOMC’s decision last month to reduce the pace of interest rate hikes. The same considerations suggest slowing the pace further at the next meeting,” Logan said.

Lori Logan, President and CEO of the Federal Reserve Bank of Dallas, attends a dinner program in Grand Teton National Park where financial leaders from around the world gather for the Jackson Hole Economic Symposium outside Jackson, Wyoming, US August 25, 2022. Photo: Jim Urquhart - Reuters

Lori Logan, President and CEO of the Federal Reserve Bank of Dallas, attends a dinner program in Grand Teton National Park where financial leaders from around the world gather for the Jackson Hole Economic Symposium outside Jackson, Wyoming, US August 25, 2022. Photo: Jim Urquhart – Reuters

President of the Federal Reserve Bank of Philadelphia Patrick Harker

I expect we’ll raise rates a couple more times this year, though, in my opinion, the days of us raising them 75 basis points at a time are certainly over. In my view, a 25 basis point hike would be appropriate going forward.

Philadelphia Fed President Patrick Harker, speaking in Delaware and New Jersey this week, also said he favors a slower pace of rate hikes and that sometime this year, he expects policy rate to be constrained enough to keep rates in place and allow monetary policy to continue. She does her job.

Shrinking the Fed’s balance sheet also removes a significant amount of easing, Harker said.

President of the St. Louis Federal Reserve James Pollard

Why don’t we go where we’re supposed to go? …why stall?

St. Louis Federal Reserve Bank President James Bullard broke with the pack this week when he assured the Wall Street Journal that Fed officials should raise the federal funds rate above 5% “as quickly as possible” before pausing rate hikes to lower interest rates. inflation.

Asked if he was open to another half-point rate increase at the next Fed meeting, Bullard replied: “Why don’t we go where we’re supposed to go? … Why procrastinate?”

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

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

Looking ahead, officials are focusing on the Employment Cost Index for December, at the end of the month, for more indications of slowing wage growth.

The Fed’s projections from December showed that officials expect to raise interest rates to just over 5% this year from the current range of 4.25% to 4.5%.

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