Hurting From Rate Hikes? The Fed Looks as If It’s Finally Done

Market pricing, verbal cues from Federal Reserve members and the likely evolution of the economic data over the next couple of months all point in the same direction — the central bank is likely done raising interest rates.

Forecasting the end of the Fed’s tightening cycle requires jumping the gun a bit. To the extent that officials ever declare rate increases are behind us, the message will only come once we have gotten through several no-change meetings. By then, we will perhaps be in an environment where economic weakness seems more likely than strong growth. But there are reasons to predict the policy turn with a fair degree of confidence now.

The first pointer comes from traders. Market-based odds of another move higher in 2023 have fallen since the September meeting to around 40% from 53%. The probability that officials hike rates on Nov. 1 is down to 12% from 31%. Barring the kind of shock that the Fed hates to deliver, we’re really talking about whether or not they tighten in December.

The shift in pricing follows commentary from Fed speakers that’s signaled a comfort with the current setting of policy, even as they retained a hawkish bias. Fed Governor Christopher Waller, who has been an important voice during this cycle, said on Wednesday that the central bank can “watch and see” before potentially acting again. Dallas Fed President Lorie Logan indicated that if risk premiums in the bond market are on the rise and weigh on economic activity, there could be “less need for additional monetary policy tightening.” The rise in longer-term interest rates — 10-year Treasury yields are up by around one percentage point since the start of June — could substitute for a final rate increase in the minds of officials, Nick Timiraos wrote in the Wall Street Journal.