Fed Governors Signal Smaller Rate Increases Coming

WASHINGTON–There is a growing chorus among Federal Reserve governors that the central bank will be slowing it pace of rate increases when the Federal Open Markets Committee meets next on Feb. 1.

Christopher Waller

Among those who have signaled the days of 50 - and 75-basis point increases are over is Federal Reserve Governor Christopher Waller, who said he believes it’s time to slow the pace of increases—but not eliminate them.

If the forecast proves true, it will mark the end of the rapid increases that took place during 2022 as the Fed sought to tamp down high inflation.

Central bankers are now “entering a new phase that is focused more on how high-interest rates rise and less on how quickly they get there,” the New York Times reported. “The thinking is that rates are now high enough to meaningfully slow the economy and that adjusting them more gradually will give policymakers time to see how their policy is working.”

As a result, many expect the FOMC to vote in favor of a quarter-point increase in early February.

“After climbing steeply and using monetary policy to significantly raise interest rates throughout the economy, it was apparent to me that it was time to slow, but not halt, the rate of ascent,” Waller said of the December downshift, according to the Times. “There appears to be little turbulence ahead, so I currently favor a 25-basis-point increase” at the Fed’s next meeting.

More Work to Do

John C. Williams, the president of the Federal Reserve Bank of New York, also said last week the central bank had more to do in its push to slow the economy, the report added. “It will take time for supply and demand to come back into proper alignment and balance, so we must keep moving,” Williams said at an event in New York, according to the Times. “Clearly some of the readings on inflation have been encouraging…If anything, I’ve been raising somewhat my forecast for growth.”

That would influence how high-interest rates needed to rise to be restrictive enough to bring inflation back down to the Fed’s goal, Williams added.

What Is the Ideal Rate?

The Times further noted many Fed officials have suggested that interest rates need to rise to above 5%, which was their expectation when they last released economic forecasts in December. Based on market pricing, investors expect policymakers to stop earlier than that, though, as they see rates rising from their current range of 4.25% to 4.5% to a peak of 4.75% to 5% before falling again by the end of the year, the Times said.