Wednesday’s Federal Reserve meeting resulted “in a pause with a hawkish clause,” in the words of KPMG economist Diane Swonk.
While the Fed kept its interest rate steady in a range of 5.25%-5.5%. Fed Chair Jerome Powell and his colleagues did not rule out one more interest-rate hike this year. At the same time, the Fed suggested rates will be “higher for longer” and could stay above 5% this year and next.
Wall Street swooned on the news. Stocks
What’s beneath the surface of the Fed’s action?
Here are three major takeaways from the Fed meeting from Eric Rosengren, who took part in the central bank’s closed-door deliberations for 14 years as president of the Boston Fed:
Fed is fighting against a much stronger economy
Rosengren thinks the big driver of the Fed’s decision is that they see a much stronger economy now than they saw in June.
Three months ago, the Fed thought the economy was going to be quite weak and they could be passive.
Now, “they are fighting against a much stronger economy. It is a pretty big shift,” Rosengren said, and the Fed “has to be more active” now.
A rate hike, if it comes, is more likely in December, not November
If the Fed is right and the economy is stronger than expected, Rosengren said he thinks the Fed is more likely to raise rates. But that will likely come at their last meeting of the year in December, rather than their next meeting in early November.
“My own inclination would be that we’re not going to get so much information by November that I would think they would need to raise the rate, so probably the probability of raising rates at the December meeting is a little higher,” Rosengren said.
Rosengren said he thinks the economy won’t be as strong as the Fed thinks and they won’t have to raise rates.
“One of the unknowns is whether the consumer continues to spend. I do think the excess savings from what was going on during the pandemic are coming down relatively quickly.” In addition, student loans are picking up and the probability of a government shutdown looks dramatically higher, he said.
“All that would tell me that a lot of the turbulence, along with an auto strike, is going to make it fairly difficult in the near term to interpret the numbers,” he said. That’s another reason he sees December as more likely than November for any hike.
Nothing is predetermined
The Fed is forecasting one more rate hike, but if “they don’t see anything that’s problematic, they won’t need it,” Rosengren said.
Powell’s cautious language just reflects all of the uncertainty in the outlook.
“They are not even certain that the next rate move is up or down,” Rosengren said.
“The way I would view this is the chair has a lot of humility about forecast errors. He’s not willing to assert anything with any kind of certainty,” he added.
“A majority of the committee still thinks the most likely outcome is they are going to have to increase rates. I am not sure he’s convinced another rate increase is going to be needed,” Rosengren said.