Fed signals pause on rate hikes

Fed Chairman Jerome Powell said he was pleased with the decline in inflation over the summer and the central bank was unlikely to raise interest rates again unless there was clear evidence that stronger economic activity would jeopardize that progress.

Powell’s comments are in line with recent comments from central bank officials about the possibility of holding interest rates steady at the next meeting on October 31 and November 1. He said the decision on whether to raise interest rates further or to keep them at current levels will depend on incoming data, forecasts and the balance of risks. Fed officials are now facing a difficult forecasting problem because although economic activity has pointed to forecasts of an upcoming recession, inflation has also fallen. Supply chains have recovered, and demand for goods, services and workers has eased as the economy reopens after the pandemic.

The question going forward is whether strong consumer spending will continue to boost hiring, boost demand and slow price increases. That could require tighter monetary policy, and the impact of recent rate hikes to slow the economy and keep inflation lower will dictate how long the Fed will hold rates at current levels before cutting. Notably, Powell said wage growth appears to be slowing at a rate consistent with the Fed’s 2% inflation target.