As inflation cools, Fed officials signal rate hikes likely done

By Ann Saphir and Michael S. Derby

(Reuters) – Federal Reserve policymakers signaled on Thursday the U.S. central bank’s interest rate hikes are likely over, but held the door open to further monetary policy tightening should progress on inflation stall, and pushed back on market expectations that there will be a quick pivot to rate cuts.

“Policy is in a very good place,” San Francisco Fed President Mary Daly told the German newspaper Borsen-Zeitung in an interview published on Thursday, adding that she has found the latest inflation data “encouraging” and noting her “base case” does not call for any further rate hikes.

Still, she said, it is “too early to know” if the Fed, which has raised its policy rate by 5.25 percentage points in the last 20 months, is finished with the rate increases.

“I’m not thinking about rate cuts at all right now,” she said. “I’m thinking about whether we have enough tightening in the system and are sufficiently restrictive to restore price stability.”

New York Fed President John Williams struck a similar tone in remarks made shortly after the U.S. government reported that the personal consumption expenditures (PCE) price index rose 3% in October from a year ago, moderating from a three-month string of 3.4% readings. The Fed targets 2% inflation.

The risks for the economy are currently two-sided between inflation that is too high and a weaker economy, Williams said, and “in balancing these risks, and based on what I know now, my assessment is that we are at, or near, the peak level of the target range of the federal funds rate.”

Williams said he expects inflation to end this year at 3%, and ebb to 2.25% in 2024, as economic growth slows to 1.25% and unemployment rises to 4.25%. The U.S. economy grew at a 5.2% annual pace last quarter, the Commerce Department reported on Wednesday, and the unemployment rate is currently 3.9%.

“If price pressures and imbalances persist more than I expect, additional policy firming may be needed,” Williams said.

The policymakers spoke just ahead of a customary blackout period where they refrain from public comment ahead of a rate-setting meeting. The Fed will hold its next policy meeting on Dec. 12-13.

Fed Chair Jerome Powell is expected to get a final word in on Friday, when he is due to speak at Spelman College in Atlanta.

Traders, who are betting heavily the Fed will keep its overnight benchmark interest rate steady in the 5.25%-5.50% range next month, pared bets that rate cuts could start as soon as March after the release of the PCE data and the remarks by Daly and Williams.

Still, prices of futures contracts tied to the Fed’s policy rate show traders see about a 75% chance of a rate cut in May, with further reductions taking it into the 4.00%-4.25% range by the end of 2024.

Like Daly, Williams called the talk of rate cuts “speculative.”

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