Fed Officials Cite Progress Vs Inflation, Reinforcing Idea That Rate-Hike Cycle is Over

Officials at the Federal Reserve aren’t ready to do a victory lap in the wake of this week’s reports showing tamer price increases than expected—but they are acknowledging progress, perhaps with the rhetorical equivalent of a satisfied nod.

Several officials who gave public speeches this week discussed Tuesday’s report on the Consumer Price Index, which showed inflation rose 3.2% over the year as of October, continuing to fall towards the Fed’s objective of a 2% annual rate. 

Market participants saw the report as a turning point. Observers have increasingly speculated about when the Fed will start reversing its campaign of anti-inflation interest rate hikes, which have driven up interest rates on all kinds of loans. Fed officials themselves were more restrained.

Chicago Fed chair Austan Goolsbee, speaking Tuesday at the Detroit Economic Club, said the report “looked pretty good,” and that there was “slow but clear progress” across different categories of goods and services. Goolsbee is a voter on the Federal Open Market Committee, the group that sets interest rates and whose membership includes presidents of the regional Federal Reserve banks on a rotating basis.

Lisa Cook, a governor of the Federal Reserve Board and also a member of the FOMC, spoke at an economic conference at the Federal Reserve Bank of San Francisco Thursday but didn’t directly mention the October report. She did, however, emphasize the risks of the Fed setting its key interest rate too high, according to prepared remarks.

By raising the Fed funds rate to a 22-year high, the Fed has pushed up borrowing costs enough to put the finances of businesses and households under pressure. Some economists expect the Fed to start cutting its rate in a matter of months lest the economy fall into a recession resulting in mass layoffs, a risk that Cook acknowledged.

“I am also attuned to the risk of an unnecessarily sharp decline in economic activity and employment,” Cook said. “Some parts of the economy are showing strain from tighter financial conditions.”

Loretta Mester, president of the Federal Reserve Bank of Cleveland and an alternate member of the FOMC, acknowledged the progress but stopped short of declaring victory in an interview with CNBC Thursday.

“We’re making progress on inflation, discernible progress,” she said. “We need to see more of that continuing…. We are going to have to see much more evidence that inflation is on a timely path back to 2%.”

Traders are pricing in just a 0.3% chance that the FOMC would raise interest rates at its next meeting in December. That’s down from the 34% chance priced in a month ago, according to the CME Group’s FedWatch tool, which forecasts rate changes based on fed futures trading data. Some traders have started to price in the possibility of a rate cut as soon as January, and the fed futures trading data shows about a 33% chance of a cut at the March meeting.