As the Federal Reserve gears up for its policy meeting this Wednesday, industry experts predict a steady hold on interest rates, despite the potential for at least one more hike before year-end. This cautious approach, according to Wilmington Trust’s chief economist, Luke Tilley, stems from a desire to avoid the inflation oversight of the 1970s and maintain tight financial conditions. The Fed is expected to strike a firm stance, emphasizing the possibility of a further hike but setting a high threshold for future cuts, unless there is a stall in progress on inflation or labor market amid stronger growth.

In recent weeks, Fed officials have signaled a pause in rate hikes, absorbing data that suggests a cooling inflation trend. A key data point emerged last Wednesday when the Consumer Price Index (CPI) showed a 0.6% rise over last month and a 3.7% increase over the prior year in August, a significant acceleration from July. However, the data also indicated signs of disinflation, with the core inflation measure — stripping out the volatile food and energy categories — showing a slowdown from July. Despite these figures, economists broadly agree that the data does not provide a strong enough case for the Fed to raise rates at this week’s meeting. The central bank’s ultimate goal remains to bring the core inflation figure down to 2%.

Federal Reserve Expected to Hold Steady on Interest Rates Amid Inflation Concerns

The U.S Federal Reserve’s policy meeting this Wednesday is expected to conclude with steady interest rates, according to economists and analysts. Despite concerns about rising inflation reminiscent of the 1970s, officials are taking a cautious approach to avoid any perceived dovishness in the market. "They need to keep financial conditions tight," said Wilmington Trust chief economist Luke Tilley.

A Stern Stance on Future Hikes

Fed officials, including Evercore ISI analyst Krishna Guha, have signaled they will maintain a firm stance on the possibility of further hikes. They have indicated a high threshold for future cuts and will not consider another hike unless there is stagnation in inflation or labor market growth. Recent comments from Fed representatives suggest a pause on new hikes this month, as they analyze data indicating a slowdown in inflation.

CPI Data and Signs of Disinflation

This caution is further supported by recent data released last Wednesday, showing the Consumer Price Index (CPI) rose 0.6% over last month and 3.7% over the prior year in August. However, a detailed analysis shows signs of disinflation, as the increase was primarily driven by gas prices. Core prices, excluding volatile food and energy categories, rose by only 4.3%, slowing from July’s 4.7% increase.

The Fed’s preferred core inflation measure, the Personal Consumption Expenditures (PCE) Index, rose by 4.2% over the prior year in July. Although higher than June’s 4.1%, it is still below the first half of the year’s 4.5%-4.6% range. Economists believe these figures are not significant enough to prompt a rate hike at this week’s policy meeting.

Current Rate Standings and Future Projections

Interest rates currently stand at 5.25%-5.5%, following 11 hikes since March 2022, marking the most aggressive action from the central bank to tackle inflation since the 1980s. In June, officials planned for two more rate hikes this year, but withdrew one in July, leaving a potential single rate hike remaining. Updated projections expected this week could confirm this outlook.

Differing Views on Future Hikes

While bond portfolio manager Wilmer Stith predicts one more hike this year, Wilmington Trust’s Tilley disagrees. He cites the trend of cooling inflation and expects the Fed’s preferred inflation gauge to slow further. He also believes that the core PCE should drop below 4% in the next two inflation reports before the Fed’s November meeting, down from 4.2% in July.

Powell’s Cautious Approach

Fed Chair Jerome Powell, speaking at the Kansas City Fed’s annual economic symposium in August, emphasized that the Fed is proceeding carefully. While acknowledging that inflation remains high, he affirmed readiness to raise rates further if necessary. Powell also acknowledged the lag effects of previous rate hikes, suggesting that further impacts may yet be felt.

The Possibility of More Action

Despite the likelihood of no rate hike this week, some officials, like Federal Reserve Bank of Dallas president Lorie Logan, have expressed that the Fed’s actions are not concluded. In a speech on September 7, Logan said, "skipping does not imply stopping," suggesting that further evaluation of data and outlook could lead to more measures to extinguish inflation.

Concluding Remarks

The Federal Reserve’s cautious approach is a clear indication of their willingness to prevent a repeat of the 1970s inflation crisis. However, their readiness to raise rates further if required shows their determination to achieve a sustainable decrease in inflation. With differing opinions among economists on future rate hikes, it will be interesting to see how the Fed’s policies evolve in the coming months. The consensus, however, is clear: the fight against inflation is far from over.