A Fed determined to impose a smaller hike may hint at fewer hikes

WASHINGTON (AP) — The Federal Reserve is poised this week to raise its benchmark interest rate for the eighth time since March. But the Federal Reserve is likely to announce a smaller hike for the second time in a row and may change some key wording in its post-meeting statement on future rate hikes.

A change in the statement, if any, could be seen as a signal of a possible pause in the Fed’s aggressive drive to raise borrowing costs. Chairman Jerome Powell is still likely to stress, however, that the Fed’s campaign to tackle high inflation is far from over.

When its final meeting ends on Wednesday, the 19-member policy-setting committee is expected to raise its key short-term interest rate, which affects many business and consumer loans, by a quarter of a point. That would raise the rate to a range of 4.5% to 4.75%, its highest level in 15 years. The Fed’s move would follow a half-point hike in December and four three-quarter point hikes before that.

Last year’s significant rate hike reflected near-unanimous agreement among Fed officials that they must act quickly to raise borrowing costs to cool the worst inflation in more than 40 years. But with signs of weaker economic growth along with steadily lower inflation readings, reduced consumer spending and even some signs of a slowdown in the labor market, the Fed is now moving on more treacherous terrain.

Less spending and hiring could help ease inflation further. But many Wall Street economists and investors worry that the Fed will raise rates too high — and keep them there too long — causing a deep recession in the process. Based on their public statements, policymakers are adamant that if they don’t continue to fight inflation with tighter credit, price spikes could accelerate again and require even more painful suppression measures.

With uncertainty so high, several officials said they preferred smaller rate hikes to allow time to assess the impact of their policies.

“If you’re on the road and you encounter foggy weather or a dangerous highway, it’s a good idea to slow down,” Laurie Logan, president of the Federal Reserve Bank of Dallas and a former senior official at the New York Federal Reserve, said in a speech earlier this month. “Similarly, if you are policymakers in today’s complex economic and financial environment.”

As the Federal Reserve cuts interest rates, it fuels enthusiasm among Wall Street investors that the marches will soon stop. Such optimism has boosted stock prices and lowered bond yields since the start of the year. Higher asset prices typically encourage spending and accelerate growth—just the opposite of what the Fed wants.

To forestall that better outlook, most analysts expect Powell to speak firmly at a news conference on Wednesday about the need for further rate hikes. It could underline the forecast that Fed officials collectively issued last month that their benchmark interest rate will rise above 5% in the coming months.

“Communication becomes very difficult at this point,” said William English, a former Fed official and professor of finance at the Yale School of Management.

Further complicating matters, according to English and some other economists, the Fed may change the statement it issues after each meeting to hint that it may be close to stopping rate hikes.

Since March, the statement has included the phrase “continued increases in (the Fed’s interest rate) will be appropriate.” English said that phrase could be changed to something like “some future increases.” That would mean the Fed is no longer committed to an open-ended rate hike.

Other Fed watchers, such as Kathy Bostiancic, chief economist at Nationwide, say they don’t foresee such changes because the Fed won’t want to excite investors.

“They don’t want financial markets to assume that a pause is around the corner,” Bostiancic said. “They can’t change that language until they want to signal that a pause is imminent.”

Powell emphasized his concern — echoed by most other Fed officials — that steady wage increases will keep inflation high among restaurants, hotels, health care, financial services and other areas of the nation’s service sector. As a result, Powell said it would take some “pain” to fully suppress inflation — including a potentially sharp increase in the unemployment rate.

On Tuesday, the government will publish its most comprehensive measure of wages, known as the Employment Cost Index. If the index shows a clear weakening of wage growth in the final three months of 2022, that could calm some of Powell’s concerns that big wage increases are fueling inflation.

However, in recent remarks and interviews, several Fed officials have said they want their key interest rate to rise above 5%, a level that would require two more quarter-point hikes in addition to Wednesday’s quarter-point hike.

“We’re not at 5% yet, we’re not above 5%, which I think is going to be necessary given what my projections are for the economy,” Loretta Mester, president of the Cleveland Federal Reserve, said in January. 17 interview for the Associated Press. “I just think we should move on.”

As the Fed faces a more uncertain environment, some disagreements are emerging among officials. While Powell emphasized the need to slow the labor market to combat inflation, for example, Vice Chairman Lael Brainard suggested that other factors, including a decline in corporate profits, could further reduce inflation without requiring massive layoffs.

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