The Fed May Be Shifting Approach on Interest Rate Hikes

Washington, DC, September 11, 2023-"For more than a year, Federal Reserve policy makers were unanimous that they would rather raise interest rates too much than too little-that is how serious they considered the threat of persistently high inflation,” reports the Wall Street Journal.

“That is changing. 

“Some officials still prefer to err on the side of raising rates too much, reasoning that they can cut them later. Now, though, other officials see risks as more balanced. They worry about raising rates and causing a downturn that turns out to be unnecessary or triggering a new bout of financial turmoil.

“The shift toward a more balanced bias on rates is driven by data showing easing inflation and a less overheated labor market. In addition, the unusually rapid rate increases implemented over the past 1½ years are expected to continue crimping demand in coming months.

“Fed officials raised rates at 11 of their past 12 meetings, most recently in July, to a range between 5.25% and 5.5%, a 22-year high. They appear to be in broad agreement to hold interest rates there at their Sept. 19-20 meeting, giving them more time to see how the economy is responding to increases.

“The bigger debate is what would prompt them to raise rates again in November or December. In June, most officials projected they would need to raise rates by another quarter point this year.

“Projections to be released at the end of the September meeting will likely show that an additional increase is still on the table. But whether they deliver such an increase is an open question. 

“For the past year, officials have placed the burden on evidence of a slowing economy to justify pausing rate increases. As inflation cools, the burden has shifted toward evidence of an accelerating economy to justify higher rates.”