Federal Reserve chairman Kevin Warsh acknowledged Wednesday that U.S. inflation is still too high, but he argued that the central bank needs more time to determine the appropriate policy for driving down the cost of living to the Fed’s goal of 2%.
The central bank’s policymaking Federal Open Market Committee voted 10-2 at the close of its two-day meeting to keep its benchmark federal funds rate in a range of 3.75% to 4%, but Warsh left open the possibility that the policy could change at the Fed’s final meeting of the year Dec. 8-9.
“The information we receive over the coming period will help us determine where we want policy to be,” he told reporters at a press conference after this week’s two-day meeting.
Warsh declared that U.S. economic activity “is expanding at a strong pace. While uncertainty remains — owing in part to geopolitical developments —domestic spending has been resilient. Productivity growth is strong and capital investment robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.”
Echoing those sentiments, data released today by the Commerce Department showed that the nation’s inflation-adjusted gross domestic product grew 3.4% in the third quarter, a pace that exceeded economists’ expectations and the fastest growth in a year. The government also said household spending rose by a strong 3.8% in the quarter.
Warsh said that since the Fed raised its federal funds rate by a quarter-point in September, financial and credit conditions have tightened for some businesses and households.
“Market participants are becoming somewhat more discerning in their capital allocations,” he said. “And while overall financial conditions are tighter, I’m unwilling and unable to call them tight. But broadly, these developments go in the direction of achieving a longer, more durable period of economic growth and price stability.”
Responding to a question about why the Fed was not making a rate move now despite stubbornly high inflation, Warsh said that taming inflation “is not about some fixed individual date on a calendar. Same way, it’s not about some isolated data point. If it were about those two things, this job would be easier, and we wouldn’t be suffering from nearly six years of inflation above target.”
Reacting to the Fed’s decision, NMMA chief economist Shawn DuBravac noted that monetary policy tends to work with a lag.
“It can take up to six months for a policy decision to fully transmit through the economy, and as a result, I expect the Fed to be measured in their speed to raise rates,” he told Trade Only Today. “The decision to pause aligns with my belief that the Fed will act intentionally but as slowly as possible.
“There is still a very credible case for additional rate hikes, and at least right now, there is a very good probability that the Fed will raise rates by 25 basis points in December,” he added. “The economy is strong, and inflation remains high, which is the right environment for rate increases. A meaningful deterioration in employment would strengthen the case to hold.”
Ian Wyatt, senior vice president and chief economist at recreational marine lender Huntington National Bank, agreed that the Fed is being deliberate about its policy decisions, and he is also betting on a rate increase in December.
“We expect the Fed is likely (60% odds) to hike at the next meeting,” he told Trade Only Today. “This Fed has shown a penchant for waiting to make a move until it feels certain. What is more important is how high do rates get, and how long do they stay elevated.
“We expect the [federal] funds rate, which drives SOFR-based floorplan loans, to peak at 4.375% or +0.5% from today in late spring/early summer, and to stay at that level for the rest of the year, as inflation shows evidence of being persistent and the blue-collar labor market remains tight,” he added.
The five-day Fort Lauderdale International Boat Show opened Wednesday, but its prospects figure to depend on how well financially positioned showgoers believe themselves to be.
“Weak consumer confidence has put a dent in large, highly discretionary purchases like boats, particularly at the mid and lower end, where higher rates are raising monthly payments,” Wyatt said. “For cash-rich, upper-end consumers, solid stock market conditions will continue to support sales.”
Warsh told reporters that the six-week period between now and the December Fed meeting will be “information-rich,” but he didn’t explain what it is that he is hoping to learn.
Wyatt and DuBravac have some thoughts on that.
“First, the Fed wants to see if job growth slows,” Wyatt said. “The labor market drives the Fed’s hesitance to hike. The other data the Fed will focus on is in the bond market. Do long-term rates continue to rise? Do we see more periods of high volatility in the bond market? The Fed’s September hike was partly driven by concerns about the bond market.”
DuBravac noted that before the December meeting, the Fed will see two more jobs reports, two Personal Consumption Expenditures Price Index reports and another Consumer Price Index report. The PCE index is the Fed’s preferred inflation gauge.
“The Fed will also see updated data on economic growth, compensation, productivity and likely an early view on holiday shopping,” he said.
The first of those PCE reports arrived this morning, and it showed that inflation, as measured by the index, rose 0.5% in September and 3.6% for the year that ended in September. That is up from an increase of 0.3% on a monthly basis and 3.4% on a year-over-year basis in August.
The core PCE index, which strips out the volatile food and energy categories, rose 0.3% for September and 3.1% on a year-over-year basis. The core figures in August were 0.2% for the month and 3% year-over-year.
DuBravac said he believes that Fed officials will focus not only on the pace of price increases, but also on how cost pressures are spreading through the economy.
“They will be looking for any sign that inflation is becoming more persistent,” he said. “The employment reports will help determine if the weak hiring we saw in September was temporary or part of a more sustained slowdown. Spending data will shine a light on both the ability and the willingness of households to spend.”
