Fed Expected to Put Interest Hike on Hold This Week

Fed Expected to Put Interest Hike on Hold This Week

The central bank meets Tuesday and Wednesday, and Wall Street is betting it will leave rates alone

Published |Updated

Al Lewis

Fed Chair Powell is likely to hang back for a month but reiterate the central bank’s resolve to keep battling inflation until the job is done. Win McNamee/Getty Images

The Federal Reserve meets Tuesday and Wednesday amid a delicate moment in its protracted fight against inflation. Should it raise interest rates again and risk throwing the economy into a recession? Or should it leave them where they are and let inflation continue to run its costly course.

Wall Street is betting that there is a 99% chance the Fed will hold pat, leaving its key interest rate at a 22-year high of 5.25% to 5.5%, according to the CME FedWatch Tool, which is based on Fed Funds futures trading.

When Fed Chair Jerome Powell speaks at 2:30 p.m. ET on Wednesday, though, he is likely to repeat his determination to raise rates in future meetings if needed – similar to his remarks last month at the central bank’s annual retreat in Jackson Hole, Wyoming.

“Powell’s forward guidance at the press conference will likely reiterate the Fed’s resolve to ‘keep at it until the job is done,’ the closing line of his speech at Jackson Hole on Aug. 25 and a reference to the title of a book by [the late Fed Chairman] Paul Volker, one of Powell’s role models,” said Bill Adams, chief economist for Comerica Bank in Dallas.

Also, on Wednesday, the Fed is scheduled to release its quarterly “Dot Plot” survey of voting members on where they think rates are headed in the months to come.

“The Dot Plot will likely signal a majority of members see a rate hike as appropriate at the following Fed decision on Nov. 1,” Adams told The Messenger, “but also that cuts are possible by mid-2024 if inflation slows as they expect.”

The Fed has raised the Federal Funds rate 11 times since March 2022. Odds that it continues to pause in its rate-hiking cycle are at about 60% through the end of the year, according to the CME tool.

Still, if the central bank is going to raise rates, it might be better to do so sooner rather than later, notes Quincy Krosby, chief global Strategist for LPL Financial in Charlotte, North Carolina. “The Fed typically doesn’t want to be involved in the drama of the presidential campaign season,” she told The Messenger in an email.

Fed policymakers have consistently said they are data dependent and at a critical point in their fight against inflation.

“We must proceed gradually, weighing the risk that inflation will be too high against the risk of dampening the economy too much,” said Lorie Logan, president of the Federal Reserve Bank of Dallas, earlier this month.

She said that skipping a rate hike, as the Fed did in June, does not mean stopping rate hikes altogether. “In coming months, further evaluation of the data and outlook could confirm that we need to do more to extinguish inflation,” she said.

The economy, though slowing, has defied predictions of a recession and continues growing at more than 2% despite the Fed’s efforts to slow it. The labor market, which has also been showing signs of cooling, is proving resilient.

Inflation is still running well-above the Fed’s 2% target. The consumer price index, for instance, clocked in at 3.7% in August, pushed to higher-than-expected levels by rising gasoline prices.

“I think the current situation, where inflation hasn’t dropped off significantly this past month, will lead the Fed to raise interest rates yet again,” said Jeff Harris, a finance and real estate professor at American University. “They have signaled no rate increase this week, but I am afraid that this recent economic data will result in further increases before 2023 is over.”

Jamie Cox of Harris Financial Group in Richmond, Virgina, says he thinks the Fed can continue to posture. “The Fed really wants to use forward guidance to control markets instead of hiking rates further, so I would expect a hawkish bend in the statement, but no raise this meeting,” he said.

Another possibility is that the Fed no longer raises rates, but keeps them at elevated levels for longer.

“We are very rapidly approaching the time when our argument is not going to be about how high should the rates go,” said Austan Goolsbee, president of the Federal Reserve Bank of Chicago, earlier this month. “It’s going to be an argument of how long do we need to keep the rates at this position before we’re sure that we’re on the path back to the target.”