Why A 0.5% Interest Rate Hike Remains Likely Wednesday As Fed Officials Gather

With the release of the latest Consumer Price Index report Tuesday, the final major economic indicator is in before Fed officials make a decision Wednesday on the federal funds rate.

Consumer prices showed a 7.1% year-over-year increase in November, down from 7.7% in October and below estimates of 7.3%.

In early November, the Fed issued its fourth consecutive 0.75% increase to the federal funds rate, which today stands between 3.75% and 4%.

The meeting of the Federal Open Market Committee, made up of the Fed officials who decide on interest rate hikes, is scheduled for Tuesday and Wednesday, Dec. 13-14, with an interest rate announcement due at 2 p.m. ET Wednesday. 

The Inflationary Landscape: In his last public speech on Nov. 30 in Washington, D.C., Fed Chair Jerome Powell said that “inflation remains far too high,” and placed price stability as the responsibility of the Federal Reserve and the bedrock of the U.S. economy.

While inflation has been on a steady decline since June’s peak of 9.1%, Powell said two weeks ago that it will take substantially more evidence to give comfort that inflation is actually declining.

Though not conclusive, November’s CPI report adds evidence to that equation.

For the Fed head, the path ahead for inflation remains highly uncertain, but he said that in order to bring inflation back down to 2%, interest rates need to be raised to levels that are “sufficiently restrictive,” anticipating that “ongoing increases will be appropriate” for that goal.

“Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” said Powell.

This comment led several commentators to assume that a 0.5% hike on interest rates would come in the December FOMC meeting. Now, with a new confirmation that inflation is following a downward trend, that assumption becomes even more substantiated.

“The time for moderating the pace of rate increases may come as soon as the December meeting,” said Powell.

For Powell, the timing of that moderation is far less significant than other measures, like how much further rates will need to be raised to control inflation, and for how long they’ll need to remain elevated.

“History cautions strongly against prematurely loosening policy. We will stay the course until the job is done,” said Powell.

Photo by Frederick Warren on Unsplash.