Fed Vice Chair Philip Jefferson and New York Fed President John Williams have in recent days suggested that policymakers believe the central bank has time to assess the economy before considering another increase.
The remarks do not mean the Fed has ruled out further policy tightening, Bloomberg reported. Officials continue to warn that inflation remains too high, while consumer price data due on October 14 could play a major role in determining the next policy move.
Ellen Meade, an economics professor at Duke University who advised Fed officials during a decades-long career at the Board of Governors, told Bloomberg the speeches by Jefferson and Williams did not necessarily amount to traditional forward guidance.
“This is the Fed behaving like the Fed,” said Meade. “But I think there’s a difference between forward guidance that locks in a rate change and forward guidance that says we’re going to take our time making a decision and collect a lot of data. Subtle, but there’s a difference,” she said.
William English, a professor at the Yale School of Management and a former Fed division director, said he did not believe the Jefferson and Williams speeches were coordinated, according to Bloomberg.
“These were people who were giving speeches that they thought were the right speeches, giving their views about the economy and policy,” he said.Meanwhile, three regional Fed presidents appearing together at a conference in Asheville, North Carolina, declined to provide clues about their expectations for the central bank’s final two meetings of the year. Richmond Fed President Tom Barkin, Boston Fed President Susan Collins and Kansas City Fed President Jeff Schmid instead pointed to upcoming economic data.
“Let’s see how things develop,” Barkin said.
Chicago Fed President Austan Goolsbee on Friday said there is room for both a rate hike and a rate cut on the table. He said the latest jobs data show the labor market is steady and that too-high inflation remains the Fed’s bigger policy priority, but added that he would look at more evidence “that suggests we’re headed back to 2% inflation”.
The Jefferson and Williams remarks were followed by comments from Michelle Bowman, a Fed governor and the central bank’s top banking regulator, who said there was little urgency to move rates again.
Dallas Fed President Lorie Logan, one of the Fed’s strongest advocates for rate hikes this year, said multiple additional increases would probably be needed to bring inflation fully back to the central bank’s 2% target. However, she also pointed to rising term premiums in bond markets, or the additional yield investors demand to hold longer-dated debt. Higher term premiums could also help slow the economy, she said.
The comments triggered a sharp repricing of expectations for Fed interest rates over the remainder of the year.
Eric Wallerstein, chief macro strategist for Clocktower Group and previously an adviser to former Fed Governor Stephen Miran, told Bloomberg the remarks from Jefferson and Williams represented clear attempts to correct market expectations.
“Officials are doing what they’ve always done,” Wallerstein said. “Talking to the market when pricing reflects the ‘wrong’ reality.”
Close observers of the Fed said the broader takeaway from the speeches was that traders had moved too far in betting on another hike following the Fed’s Sept. 16 increase, particularly as a sharp rise in bond yields pushed borrowing costs higher.
Before Williams spoke on Tuesday, traders saw a 70% probability of a hike at the Oct. 27-28 meeting, based on federal funds futures pricing. By the time Jefferson finished his speech on Thursday, those odds had fallen to about 25%, with softer-than-expected inflation data also contributing to the shift.
As president of the New York Fed, Williams has a permanent vote on monetary policy and, by tradition, serves as vice chair of the Federal Open Market Committee. Alongside the chair and vice chair, the New York Fed president has historically been viewed as part of the central bank’s leadership “troika” on monetary policy.
Under some previous Fed chairs, investors interpreted comments from the vice chair or New York Fed president as signals of the broader views of the troika. There is no evidence, however, that Jefferson and Williams coordinated their speeches with each other or with Warsh, Bloomberg reported.
Goldman Sachs economists said the combination of the Jefferson and Williams speeches reinforced their view that an October rate hike is unlikely, a conclusion echoed by other analysts.
“We think the joint message from Jefferson and Williams is authoritative,” Krishna Guha, head of economics at Evercore ISI, and colleagues wrote in a note to clients Thursday after Jefferson made his remarks.
Michael Feroli, chief US economist at JPMorgan Chase & Co., told Bloomberg the two speeches represented a clear effort to manage market expectations.
“In both cases, it’s the message that you don’t have to keep piling hike on hike, meeting per meeting, and that you can kind of space things out a little bit here,” he said.
Fed policymakers last month unanimously voted to raise interest rates by a quarter percentage point, marking the first increase since 2023 as the broader economy accelerated and inflation remained stubbornly high. In projections released after the decision, officials indicated support for one additional rate hike this year.
Warsh, however, has moved away from actively steering market expectations through forward guidance. He does not participate in the quarterly rate projections and has avoided signaling future policy moves in public remarks. Instead, he has encouraged investors to focus on incoming economic data.
The shift has attracted support from some economists and market observers. Critics of forward guidance argue that it can be useful during a crisis but has less value when economic conditions are changing rapidly and policymakers have limited visibility into the outlook.
(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)
