Federal Reserve Chairman Jerome Powell and his colleagues are likely to shy away from signaling that they’re done raising interest rates when they meet next week.
With inflation still above its 2% target and economic growth solid, US central bankers probably will retain a bias toward tighter policy at their Sept. 19-20 meeting even as they hold rates steady.
“There’s no way they’re going to signal they’re done here,” said Bruce Kasman, chief economist at JPMorgan Chase & Co.
That’s in contrast to the somewhat muddy message that came from the European Central Bank on Thursday as it increased rates by a quarter percentage point.
While ECB President Christine Lagarde declined to say whether rates had peaked, investors took the central bank’s post-meeting policy statement as signaling that European policymakers are finished raising rates. The euro fell and bonds rallied as traders marked down the odds of another ECB rate increase.
In a comment that investors zeroed in on, the bank said it “considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”
In the parlance of traders, the message from the Fed next week is more likely to be a “hawkish hold” on rates than the “dovish hike” that the ECB is perceived as delivering on Thursday.
Speaking to reporters after the meeting, Lagarde said the euro area was experiencing a period of “very, very sluggish growth.”
Powell, for his part, told the Fed’s Jackson Hole conference on Aug. 25 that US policymakers “are attentive to signs that the economy may not be cooling as expected” as it seeks to bring demand better in line with supply and reduce inflation further.
US policymakers are expected to significantly raise their forecast for growth this year in projections to be released after next week’s meeting. At the Fed’s last forecasting round in June, officials saw the economy expanding 1% this year, according to their median prediction.
“I don’t see much upside for Powell to declare a definitive end to hiking,” said Derek Tang, an economist with LH Meyer/Monetary Policy Analytics. “Better for Powell to emphasize upside optionality given that they are not hiking in September.”
JPMorgan’s Kasman said the so-called dot plot the Fed will release after the meeting will likely show that the median policymaker expects the central bank to raise rates one more time this year, leaving the door open to an increase at its November or December meetings.
Powell’s message at his post-meeting press conference may be a bit more nuanced, flagging the progress the Fed has made in lowering inflation, Kasman added.
Duration Focus
Lagarde said Thursday that policymakers’ “focus is probably going to move a bit more to the duration” of how long rates will stay elevated, though she added “that is not to say — because we can’t say — that now that we are at peak.”
That echoed comments by Chicago Fed President Austan Goolsbee. “We are very rapidly approaching the time when our argument is not going to be about how high should the rates go,” he said Sept. 7.
But economists are betting Powell won’t go as far next week as Lagarde did Thursday.
“She raised rates in hopes of a pause,” said Diane Swonk, the chief economist at KPMG LLP. “He is pausing in the hope he doesn’t have to raise again. That is where the difference in messaging lies. He will leave door open to another hike.”
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