The building of the Federal Reserve is seen before the Federal Reserve is expected to signal a plan to raise interest rates in March as it focuses on fighting inflation, in Washington, January 26, 2022.
Joshua Roberts | Reuters
The Federal Reserve is expected to start raising interest rates next month and will not slow down well into 2023, although the slope of growth could soften slightly.
The events of the past week, including statements from several Fed officials and, to a lesser extent, geopolitical turmoil, have reassured markets that a first rate move would be just a quarter percentage point higher.
The change came as traders were setting prices twice that size at the March 15-16 Federal Open Market Committee meeting. Central bankers are considering the need to go up 50 basis points at the meeting, with New York Fed Chairman John Williams saying last week that there is “no compelling rationale” for the move.
Still, it hasn’t made investors any less nervous about what the road ahead will look like.
“I’m Not So Worried About Whether They Do 50″ [basis] exits the gate or not. But I also think they shouldn’t overdo it here,” said Jim Paulsen, chief investment strategist at Leuthold Group. “You can do 25, and if you want to do another one soon, you can do it. , rather than adding extra disruption or uncertainty.”
Indeed, markets have been volatile in 2022 as inflation has risen sharply and pushed the Fed into a position where it is essentially being forced to tighten policy. Consumer prices have risen 7.5% over the past year, well ahead of the 2% level that the Fed considers healthy for inflation.
Markets are playing the guessing game this year, trying to figure out how far the Fed will go. According to data from the CME Group, current expectations are set for March growth and there is a slightly better than 50% chance that the Fed will hike seven this year, an increase in each of its remaining meetings.
The Russia-Ukraine conflict has added another wrinkle for the Fed. Prices of some commodities such as energy and grain have risen higher as the prospect of a full-blown Russian invasion intensifies. Fed officials will have to weigh the merits of hiking rates to fight inflation in the face of any potential economic downturn.
However, Paulson and others say they don’t think the situation factored too much into the Fed’s thinking, and most economists expect rate hikes to go further than anticipated.
For example, late last week, Bruce Kasman, chief economist at JPMorgan Chase, said he expects the Fed to hike in each of its next nine meetings.
‘Shock and astonishment’ danger
Paulson said he agreed the Fed should raise rates but did so deliberately.
“If you’re going to shock and awe out of the gate, or hang it there as best you can, it adds more uncertainty,” he said. “It would be more helpful if the Fed said we’re going to get to this point, but we’re going to measure up.”
In remarks on Monday, Fed Governor Michelle Bowman gave some credence to the idea when she indicated that a 50-basis-point increase in March is still on the table.
“I will look closely at the data at the March meeting to judge the appropriate size of the increase,” Bowman said.
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Based on Bowman’s speech, Citigroup economist Andrew Hollenhorst said, “We’ll take that seriously,” so a big first step is at least “dependent on upcoming household data.”
A big data point comes Friday, when the Commerce Department releases its personal income and outlay report for January that will include the Personal Consumption Expenditure Price Index, the Fed’s preferred inflation gauge. Policymakers will be focused on the so-called core PCE data, which excludes food and energy and is expected to show 5.1% year-over-year growth, including a 0.5% jump, for the month.
If this estimate turns out to be correct, it would be the fastest in one year since September 1983.
Chicago Fed President Charles Evans said during an appearance in New York on Friday that “the current monetary policy stance is incorrect and requires substantial adjustment.” The words were notable of a FOMC member who was generally considered most polite, or in favor of looser policy and lower interest rates.
“Frankly, it is another understatement to say that inflation has exceeded the moderate persistent overshooting of 2% that the Committee had previously sought and a policy adjustment is in order,” Evans said. “But how big should it be?”