- The Federal Reserve could raise its benchmark interest rate again, a Fed official said, pushing back against market expectations that the central bank is done its anti-inflation rate hike campaign.
- Traders overwhelmingly expect interest rates to stay flat, then be cut in a few months because inflation is receding towards the central bank's goal of a 2% annual rate.
- Higher interest rates have pushed up borrowing costs on all kinds of loans, squeezing the economy.
- So far, unemployment has stayed low in spite of high interest rates, a nearly unprecedented combination.
Markets may be betting the Federal Reserve’s campaign of anti-inflation rate hikes is over, but at least one official isn’t so sure.
Much like a string of Fed officials who spoke earlier this week, Susan Collins, President of the Federal Reserve Bank of Boston, said she was encouraged by recent data on inflation showing that consumer price increases are cooling off faster than expected when she was interviewed on CNBC Friday. However, she didn’t agree with traders who are overwhelmingly betting the Fed’s next move will be to lower its benchmark interest rate from its current 22-year high in the coming months.
“We need to be patient and resolute and I wouldn't take traditional firming off the table,” she said. “We need to look holistically at the data.”
Collins’s comments highlighted the tough balancing act that she and other policymakers at the Fed are trying to pull off. Since March 2022, the Fed has raised its key interest rate to a 22-year high in an effort to stem inflation. High interest rates have pushed up borrowing costs on all kinds of loans, making it harder for individuals and businesses to spend, which the Fed hoped would discourage spending and allow supply and demand to rebalance.
The challenge for the Fed is to set rates high enough to quash inflation, but not so high that the economy slows down too much and falls into a recession. Historically, recessions have followed nearly every time the Fed has fought inflation.
Collins and other officials are scouring economic data for signs that inflation—running at an annual rate of 3.2% by one measure—will fall to the Fed’s 2% goal and stay there. It had gotten as high as 9.1% in June 2022.
Doing that without a recession and mass layoffs would be a historic accomplishment, and so far, unemployment has indeed stayed low even as inflation has fallen, keeping the possibility alive that the economy will have an elusive “soft landing” from high inflation, rather than a crash.
Austan Goolsbee, president of the Chicago Fed, said the Fed’s actions would be studied for years to come if they managed to pull it off.
“If this continued, this would be the mother of all the soft landings,” he said at a banker’s symposium Friday.
Both Collins and Goolsbee said rental rates, which make up a large part of inflation measures, would be a key data point. Some measures of rental prices, such as the Zillow Observed Rent Index, have shown rental increases moderating in recent months after rising dramatically during the pandemic. Official measures of inflation, such as the Consumer Price Index, take longer to register those changes, so Fed officials are hopeful that rent will soon put more downward pressure on inflation.
Collins’s remarks on the possibility of future hikes failed to budge market perceptions that interest rates have reached their peak. Traders were pricing a 0% chance of a Fed rate hike at the next FOMC meetings in December and January, and a 30% chance of a rate cut as soon as March, according to the CME Group’s FedWatch tool, which forecasts rate hikes based on fed futures trading data.