Following Chairman Jerome Powell’s public pledge to reduce inflation even if unemployment increases, the Federal Reserve appears on track to raise interest rates by another 0.75 percentage point this month. Fed officials have done little to push back against market expectations of a third consecutive 0.75-point rate rise in recent public statements and interviews ahead of their Sept. 20-21 policy meeting. In a speech on Aug. 26 in Jackson Hole, Wyo., Mr. Powell underscored the central bank’s commitment to boosting interest rates enough to lower inflation from 40-year highs. We’ll keep working until we’re confident the job is finished, he said.
His remarks and tone placed him among the Fed officials who favor a more aggressive pace of rate increases than others, said Tim Duy, the chief U.S. economist at research firm SGH Macro Advisors. He believes that raising rates by 0.75 percentage points would fit that approach. Mr. Powell’s speech showed he very much did not want to leave the impression that the Fed would fall short in fighting inflation, Mr. Duy said.
In an Aug. 18 interview, St. Louis Fed President James Bullard stated that he was leaning toward a 0.75-point rate increase at the upcoming Fed meeting. We should continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation, he said.
Fed officials have raised rates this year at the fastest clip since the early 1980s, taking their benchmark federal-funds rate from near zero in March to a range between 2.25% and 2.5% in July.
On Sept. 20-21, they will likely decide whether to approve another 0.75-point rate hike based on two questions: How much higher do they expect to hike rates in the months ahead, and what steps will they take to get there?
It has been suggested that the fed-funds rate could reach 4% by year’s end, which is about 1.5 percentage points higher than it is at present. This year, rate hikes of varying magnitudes could be implemented at the three remaining Fed meetings. At the meeting, analysts predict a 0.75-point rate increase, followed by smaller increases in the next two.
The argument is you’re going to have to go much further than where policy rates are now, and the risk of overshooting is still fairly low, said Mr. Duy. And you would rather try to get a little bit more ahead of the curve rather than risk falling behind; further, he added. It is also possible to raise rates by half a percentage point at each of the remaining meetings this year.
Officials will submit new economic projections at their meeting this month, showing how high they expect to lift the fed-funds rate by year’s end.
In an interview last week, New York Fed President John Williams stated that their next steps should be guided by where we want to see interest rates by the end of the year and into next year. If the data show that we need to raise interest rates significantly by the end of the year, that informs a decision at any given meeting.
There has been a strong labor market in the United States this year, with employers adding 315,000 jobs in August, a robust gain. While inflation slowed slightly in July, underlying price pressures and wage growth suggest it could run well above the Fed’s 2% target for some time. The Labor Department will release its August inflation report next week.
Mr. Powell is set to speak Thursday in a moderated discussion at the Cato Institute, his last scheduled public remarks before the coming Fed meeting.
The Fed is raising interest rates to combat inflation by slowing the economy through tighter financial conditions, such as higher mortgage rates and bond yields and lower stock prices, which typically reduce spending, hiring, and investment. Any sustained easing in financial conditions—such as falling yields and rising stocks—could have the opposite effect, fueling inflation.
Following Mr. Powell’s July 26-27 news conference at which he suggested the central bank would slow its rate increases at some point, officials have been concerned about how markets rallied-easing financial conditions.
There is a risk that the rally will undo some of the work done by the Fed to slow the economy. In mid-August, the average 30-year fixed mortgage dropped from 5.82% to 5.45%, according to the Mortgage Bankers Association. The central bank wants to convey its expectations that rates will remain high for longer, and one way to do that is to raise rates a third time by 0.75 points, said Mr. Duy.