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The Fed no longer wants to raise rates

The Fed’s blackout period started on Saturday in the run-up to the September 19th and 20th FOMC meeting and so we’ve heard from all FOMC members that wanted to speak. Based on their words and market pricing, it is nearly assured that they will not raise rates then; the market gives it just a 7% probability. However, the market is priced for nearly even-odds (44%) of a 0.25% raise by their November 1st meeting. The economic data in-between will determine if that raise happens or not.

But, new in the last two weeks, FOMC members are hinting at being done or one raise away from being done with the raising cycle. I suspect, and Patrick Harker, President of the Philadelphia Fed, says it below; that the Fed’s business contacts are telling them “enough already.” Even among the Fed’s most ardent hawks, the tone has changed. Chistopher Waller, an influential Federal Reserve Board member who has been hawkish, said in an interview last Tuesday, “It’s not obvious that we’re in real danger of doing a lot of damage to the job market, even if we raise rates one more time.” The limitation of “one more time” is new.

FOMC member speeches and interviews since the Jackson Hole symposium have elements suggesting that the Fed is about done raising rates (my emphasis),

8/24/2023, Patrick Harker, Philadelphia Fed Bank President, Interview with Yahoo Finance,

  • “Right now I think that we’ve probably done enough and it’s probably a good idea to hold steady for the rest of this year and see how that affects the economy”
  • “I’m in the camp of let the restrictive stance work for a while, let’s just let this play out for a while, and that should bring inflation down.”
  • “What I’ve heard loud and clear through my summer travels is, ‘please, you’ve gone up very rapidly. We need to absorb that’”

8/25/2023, Jerome Powell, Chairman of the Federal Reserve, Symposium Keynote speech,

  • “Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks.”
  • “We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation.”
  • “The wide range of estimates of these lags suggests that there may be significant further drag in the pipeline.”

8/31/2023, Raphael Bostic, Atlanta Fed Bank President, South African Reserve Bank Biennial Conference speech, ,

  • “Based on current dynamics in the macroeconomy, I feel policy is appropriately restrictive,”
  • “I think we should be cautious and patient and let the restrictive policy continue to influence the economy, lest we risk tightening too much and inflicting unnecessary economic pain.”

9/5/2023, Christopher Waller, Federal Reserve Board, Interview with Steve Liesman on CNBC, ,

  • “There’s nothing that is saying we need to do anything imminent anytime soon, so we can just sit there, wait for the data and see if things continue.”
  • “It’s not obvious that we’re in real danger of doing a lot of damage to the job market, even if we raise rates one more time.”

9/6/2023, Susan Collins, Boston Fed Bank President, Speech to New England Council, ,

  • “The risk of inflation staying higher for longer must now be weighed against the risk that an overly restrictive stance of monetary policy will lead to a greater slowdown in activity than is needed to restore price stability,”
  • “This phase of our policy cycle requires patience, and holistic data assessment, while we stay the course,”
  • “And while we may be near, or even at, the peak for policy rates, further tightening could be warranted, depending on the incoming data.”
  • “Because of how expeditiously we moved at the outset, I think we’ve positioned ourselves to be able to be quite patient and to really gather quite a bit of information as we make decisions about how high and how long,”

9/7/2023, John Williams, New York Fed Bank President, Interview with Michael McKee on Bloomberg TV,

“I think we’ve gotten monetary policy in a very good place in terms of we have a restrictive stance of policy”

9/7/2023, Even Lorie Logan, Dallas Fed Bank President who has been the most hawkish, explained in a speech last Thursday that her base case is to raise rates again but that it is past time to blindly put cold buckets of water (higher rates) on the fire (inflation) using her metaphor below. From her speech to Southern Methodist University,

“Visiting the Wyoming mountains reminded me of being in the Girl Scouts growing up. I cherished evenings around the campfire with my friends. But you can stay up only so late and eat only so many s’mores. Eventually, you have to put the fire out. Now, as every Scout knows, when you put out your campfire, you must make sure it is “cold out”—so completely extinguished that you feel no heat when you touch the ashes with your bare hands. Any warm embers could reignite later. The traditional way to make sure a fire is cold out is to pour water on it—lots of water—until you have eliminated every last bit of heat.

That is a good way to put out campfires, but I will argue today that it is not a good way to put out inflation. The Federal Open Market Committee (FOMC) is strongly committed to our 2 percent inflation target. After the unacceptably rapid price increases of the past several years, I’m not yet convinced that we’ve extinguished excess inflation. But in today’s complex economic environment, returning inflation to 2 percent will require a carefully calibrated approach—not endless buckets of cold water.

The Wall Street Journal has an article by Fed reporter Nick Timiraos with a similar sentiment today, “An Important Shift in Fed Officials’ Rate Stance is Under Way.”