Fed Leaders Indicate They are Pausing Rate Hikes, Says NAFCU Economist

Keynote Speaker in Clearwater Beach, FL., Curt Long Chief Economist and Vice President of Research for NAFCU

WASHINGTON—The Fed chairman and other Fed leaders are sending some signals that after a year-plus of ongoing rate hikes aimed at cutting inflation, they are prepared to pause.

Curt Long

The insights were shared by Fed Chairman Jerome Powell and Federal Reserve Bank of New York President John Williams during a research conference.

“Both Chair Powell’s remarks and the new research from the New York Fed show two distinct paths to the same destination: a pause in rate hikes,” said NAFCU Chief Economist and Vice President of Research Curt Long. “Some Federal Open Market Committee (FOMC)] members may be more persuaded by concerns over banking stability and a looming credit crunch, while others will view current rates as being high enough relative to the neutral rate of interest and focus on letting policy lags play out. For the time being, the hurdle for further rate hikes is quite large.”

During a panel discussion with former Fed Chair Ben Bernanke, Powell responded to concerns around the strength of the U.S. banking system, saying it is “well positioned” to deal with current and future challenges. On interest rate policy, he said it “may not need to rise as much as it would have otherwise to achieve our goals,” given current tighter economic conditions.

What Research Showed

Williams shared research showing that the neutral rate of interest – or the rate of interest needed to keep the economy growing at a steady rate once full employment and stable inflation are achieved – has fallen back to pre-COVID levels. Were the neutral rate estimate higher, that would provide evidence that the FOMC needs to continue to raise rates to stem inflation and that officials may need to maintain higher rates even after inflation is under control, according to Williams.

Williams said the model indicated “there is no evidence that the era of very low natural rates of interest has ended,” according to the report.