Fed’s Potential Short Pause in Rate Hikes
If the Federal Reserve ‘skips’ raising interest rates next week only to tighten monetary policy again a month later, which is what some U.S. central bank officials are indicating and markets are pricing, it will be the shortest pause in the modern era. U.S. unemployment is near a 50-year low and inflation is still well above target, and unlikely to get back there until 2025, according to Fed policymakers’ own median forecast.
A one-off pause would not be unique globally. The Reserve Bank of Australia seems to have executed a one-meeting ‘skip’, but perhaps more by accident than design. Signaling a one- or even two-meeting break from raising rates is likely a communications tactic aimed at buying policymakers more time to judge what to do next – but also reining in markets from betting the cycle in done.
Finger in the Wind
Given the policy-setting Federal Open Market Committee’s meeting schedule, there will be nearly two full months worth of incoming data after the July 26 decision for Fed Chair Jerome Powell and his colleagues to assess before their next decision on Sept. 20. The Fed will hope it can convince markets that a ‘skip’ is not a pivot, and some may see it as the logical next stage in a gradual slowing of policy tightening.
‘Skipping’ a meeting would be rare, but in the post-pandemic world of extremely low visibility, perhaps fitting. “The Fed at different times has expressed misgivings about locking itself into metronomic patterns, and they have certainly not been on one in this cycle,” said Lou Crandall, chief economist at Wrightson ICAP.