Fed Officials Stay on Message as Policy Meeting Nears

Fed officials remain united regarding the level of interest rate hikes still needed to quell inflation adequately.

On a day when separate economic reports exhibited weakening business conditions amid a resilient jobs market, Fed Governor Lael Brainard and Susan Collins, president of the Boston Fed, echoed recent comments from Fed chair Jerome Powell and other colleagues.

The Fed, they said, may reduce the degree of its interest rate increases in the near term. But those increases will push the central bank's benchmark rate past 5% from today's 4.25-4.5%, with no rate cuts in sight.

"While it is promising to see the effects of higher rates starting to spread from the most interest-sensitive sectors to the broader economy, more is required to ensure a steady path toward our inflation target," Collins said at the Boston Fed's conference on the New England economy. "I anticipate the need for further rate increases, likely to just above 5%, and then holding rates at that level for some time."

Brainard concurred during a speech in Chicago, emphasizing that bringing inflation down to its 2% annual target remains the Fed's key objective.

"Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis," Brainard said.

Expectations for Next FOMC Meeting

Most investors expect the Fed will raise its benchmark rate by 25 basis points (bps) to 4.5-4.75% at the central bank's next Federal Open Market Committee (FOMC) meeting Jan. 31 -Feb. 1. An increase of that scope would mark a pullback from December's 50-bps hike, which came after four straight hikes of 75 bps since.

Inflation, as measured by the Consumer Price Index (CPI), has declined in recent months. In December, the CPI fell 0.1% from November, its first month-to-month decrease since May 2020, during the height of the pandemic. On an annual basis, CPI fell for the sixth straight month in December after peaking at 9.1% in June. Still, at 6.5%, it remained far higher than the Fed's target.

The Philadelphia Fed said today its monthly regional manufacturing index, a closely watched indicator for the broader U.S. economy, remained negative for the fifth straight month. Earlier this week, the New York Fed's Empire State survey fell deeper into negative territory. Negative readings in both surveys indicate contracting economic conditions.

However, today's weekly jobless claims report from the Labor Department revealed an unexpected drop in new unemployment claims to 190,000 last week. The figure confirmed the U.S. labor market remains tight; prior to the pandemic, new weekly claims averaged 220,000.

The claims report dampened hopes that a cooling jobs market might bring down rising wages. The Labor Department's monthly jobs report earlier this month noted slowing wage growth in December, but investors believe the Fed will need to see more improvement before considering a halt to its rate-hike campaign.

Today's comments and other recent, consistent statements by Fed officials regarding the path of interest rates have done little to alter that belief.