US Fed set to slow rate hikes but signal inflation fight not over
Source: AFP
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The Federal Reserve starts the second day of its policy meeting Wednesday, on growing expectations that it will step down to a smaller interest rate hike as red-hot inflation shows signs of cooling.
But the US central bank is likely to push on with efforts to rein in costs, concerned about the risks of taking its foot off the gas too quickly.
The Fed cranked up the benchmark lending rate seven times last year, including four consecutive 0.75 percentage point increases, lifting borrowing costs in hopes of dampening demand.
The aim is to rein in inflation, which surged to its fastest pace in decades in mid-2022 but has since come off a peak.
Policymakers are widely expected to announce a 0.25 percentage point rate hike at the end of their two-day meeting, slowing from a half-point increase in December and steeper hikes before that.
Not done yet
But Ryan Sweet, chief US economist at Oxford Economics anticipates this will be accompanied by signals that the Fed is not done yet.
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"They want concrete evidence that they've killed inflation, and they haven't yet," he told AFP.
An easing of supply chain stress and shift from spending on goods to services allows the cost of goods to moderate.
"However, it is sticky services prices that will keep the Fed on its rate-hiking course," he said in a recent report.
Analysts expect that the Fed is looking for labor market conditions to ease, reducing wage pressures and services inflation.
For now, data released Tuesday showed that a measure of pay and benefits rose less than expected in the fourth quarter last year, adding to signs that the labor market is cooling.
Time to halt?
Ian Shepherdson, chief economist of Pantheon Macroeconomics, argues it is time to pause the Fed's rate hikes, saying in a tweet on Tuesday that "their work is done."
"They have suppressed inflation expectations; the Covid distortions to rents and margins are working through and will drive inflation down," he added.
"Every further Fed rate hike from here just increases the chance of an entirely unnecessary recession," said Shepherdson.
Some Democrats in Congress have also expressed concern over rate increases, with Senator John Hickenlooper urging this week for the central bank to "proceed with caution."
But Fed officials have expressed determination to stay the course, with Fed Chair Jerome Powell telling reporters in December that "the historical record cautions strongly against prematurely loosening policy."
Sweet of Oxford Economics told AFP: "If they signal that they're done and then have to reverse course, that's going to be very disruptive to financial markets."
In a speech this month, Fed Governor Christopher Waller cautioned against being "head-faked" by a temporary trend of positive data.
He added that he will be looking for recent improvements in inflation figures to continue.
"We still have a considerable way to go toward our two percent inflation goal, and I expect to support continued tightening of monetary policy," Waller said in the earlier speech.
Source: AFP
