Some eight months after embarking on the most radical reversal in monetary policy in decades, the Federal Reserve is learning that there is only so much catching up it can do. This morning, Fed whisperer Nick Timiraos of the Wall Street Journal reported that, by December, the central bank will probably slow the pace of interest rate hikes, after jacking up rates at the fastest pace in 40 years, in order to keep the economy from sinking into a recession. Since March, the Fed has been making up for lost time, after spending most of 2021, and the beginning months of this year, dismissing this year’s runaway inflation as a temporary phenomena. Now, it appears that Fed Chair Jerome Powell is feeling like he can take his foot off the gas (at least a little bit):
The report is typical of the WSJ’s house style for such a report: an oracular view-from-above supported by public comments made by Fed officials in recent weeks that trade in the same theme. By the beginning of November, the Fed will have raised rates four times by 0.75 percent — a massive, high-speed move by the recent standards of the central bank. The effects of this around the globe have been chaotic, with the dollar surging to nearly all-time highs, sending Japan and the U.K. into crisis as their currencies have plunged. According to Timiraos, the Fed expects to start pulling back on that pace by December, and raise rates by “just” 0.5 percent during its last meeting of the year. The signal here is that this phase of the fight against inflation – with rapid three-quarter point hikes – is coming to an end.
So that’s the good news, but it isn’t time to unleash the Mission Accomplished banner yet. No one is predicting that inflation has been defeated. Data from Redfin keeps showing that rents are rising, and a recent Goldman Sachs report predicted that that’s going to continue into next year, especially for people who renew their leases. And then there are the trickier problems, like the cost of most kinds of fuel, which are more influenced by the whims of Saudi Arabia and Russia. The cost of fuel, especially diesel, tends to bleed into everything else, since shipping and agriculture depend so much on it. And while stock markets rallied a bit on the news, a key part of the bond market — often a better gauge of where inflation is headed — sold off, indicating that investors didn’t think that longer-term inflation was going to get better.
Still, it’s been an extraordinary year. If the Timiraos report is right, and he has a spotless record on these things, the baseline interest rate will have gone from around 0 in February to topping out at 4.5 percent by Christmas. It’s the reason no one is buying houses anymore, and key to the fall in stock, bond, and crypto markets this year. We may still yet have a recession next year, and there is no guarantee that the Fed won’t turn around and start raising rates at a more extreme clip next year. But at least for now, there’s a sense that the worst might really be over.
