The Fed can pivot when these 5 key conditions are met as inflation pressure sets a high bar for cutting rates, economist says
- The Federal Reserve faces a high bar before it can start cutting rates, according to Comerica Bank.
- In addition to slower inflation, other conditions must be met as well, chief economist Bill Adams said.
The Federal Reserve must wait for several conditions that go beyond a slowdown in inflation before it can pivot away from monetary tightening, according to Comerica Bank chief economist Bill Adams.
In a note published late Wednesday, he noted that while inflation has cooled in some sectors like home and used car prices, it has picked up in "sticky" service prices over the last year.
That increased inflationary momentum sets a high bar for the Fed to conclude its tightening campaign and an even higher bar to cut rates, Adams added.
"For the Fed to really pivot, and not just slow rate hikes, they will want to see slower total and core inflation, pullbacks in house prices and rents, slower wage growth, lower job openings, and likely an increase in the unemployment rate to be convinced that the slowdown in inflation that is expected in 2023 does not give way to another jump higher in 2024," he said.
The note came after the Fed on Wednesday hiked benchmark rates by 75 basis points for the fourth consecutive meeting, largely meeting consensus expectations.
A newly added line in its policy announcement that said the Fed would consider "cumulative tightening" and lags with which monetary policy affect the economy were signals to Adams that the central bank has opened the door to smaller rate hikes and likely to a pause in early 2023 with the fed funds target between 4.5% and 5%.
However, Fed Chairman Jerome Powell's hawkish tone at a press conference later on Wednesday sent stocks lower and investors fleeing for cover.
In particular, he noted that the eventual peak in the fed fund rates may be higher than previously anticipated as inflation has remained persistent.
And a key component in today's current high inflation rate is energy, which Adams said would figure into the Fed's considerations.
"More immediately, the risk of another spike in energy prices over the winter heating season is another reason why the Fed will want more evidence that inflation is coming down before coming off the rate hike warpath," he concluded.