© Reuters. SUBMIT PHOTO: The Federal Reserve structure in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo
By Howard Schneider
WASHINGTON (Reuters) – Brace yourselves! U.S. Federal Reserve authorities appear on track to end the year with interest rate hikes as a distant memory. However, a coming challenge over when and how to indicate a turn to rate cuts looms, and it’s something that investors, political leaders, and the general public might urgently need sooner than the reserve bank is prepared to deliver.
The issue might seem remote to some, but it’s a hot topic behind closed doors. A closely watched measure of underlying inflation remains at 3.5% year-over-year, significantly above the Fed’s 2% target. Policymakers still fret about its resurgence in a low-unemployment economy, and their rhetoric hints more towards a prolonged rates plateau or perhaps another hike.
The hawkish tilt in their words is also a way to keep options open at a time of uncertainty, even as the outlook has made Fed officials increasingly confident that the federal funds rate range of 5.25% to 5.5% in place since July is sufficient to take some steam out of the economy and lower inflation the rest of the way.
Deciding when inflation has fallen enough to begin cutting rates could be a matter of months, with the challenges of presidential election-year politics, twitchy financial markets, and desires to limit any increase in the unemployment rate all coming into play.
The initial step towards that argument will take place at the Fed’s last meeting of the year on Dec. 12-13, when, in addition to deciding what to do with interest rates, officials must pencil in where they believe rates are likely headed next year and beyond.
“They will have a real uncomfortable time in December,” said Vincent Reinhart, Dreyfus & Mellon chief economist and a former top Fed monetary policy official.
Since June, the quarterly “dot plot” of policymakers’ forecasts of the appropriate course of policy has shown rates increasing another quarter point this year.
Policymakers next week are expected to hold rates stable for the third meeting in a row and in a new policy statement interpret data that has largely moved in line with a “soft landing” in which economic activity and job growth slow modestly as inflation gradually declines.
One challenge will be reconciling that assessment with officials’ desire to keep an open option for further rate increases if inflation does not behave as hoped.
As they did in September, the updated forecasts are likely to show interest rates will be lower by the end of 2024,
