Fed Officials Say They Might Raise Rates Again—Market Participants Aren't Buying It

Officials at the Federal Reserve said they might raise the central bank’s benchmark interest rate over its current 22-year high—but financial markets participants, for the most part, don’t believe them.

Federal Reserve chair Jerome Powell was among several Fed officials who spoke Thursday, emphasizing that the Fed merely paused—not ended—its campaign of anti-inflation interest rate hikes when it kept rates flat at its latest meeting last week. The Fed could squeeze inflation, and the economy, harder with more rate hikes if inflation doesn’t fall toward the Fed’s goal of a 2% annual rate, Powell and others said. 

Market participants are closely watching every utterance from Fed officials for any clues on what comes next for monetary policy. On Thursday, as the market digested the latest comments, the S&P 500 index fell 0.8%, breaking an eight-session streak of gains for stocks, while Treasury yields rose.

However, traders were still only pricing in a 15% chance the Fed will raise rates next month, according to the CME Group’s FedWatch tool, which forecasts rate hikes based on fed futures trading data. While up from 10% on Wednesday, the priced-in probability is down from 20% a week ago. Traders see a 23.5% chance of a hike in January.

With inflation already on a downward trajectory this year, some economists forecast it will simmer down without any more help from the Fed, especially with wage increases slowing recently, and rent and home prices no longer ballooning like they did during the pandemic. Powell, however, took a hawkish tone.

“We know that ongoing progress toward our 2% goal is not assured: Inflation has given us a few head fakes,” said Powell, speaking at a conference of the International Monetary Fund in Washington. “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”

Since the Fed’s campaign began, inflation has cooled significantly, hitting a 3.7% annual rate in September, down from its peak of 9.1% in June 2022 as measured by the Consumer Price Index. But with inflation still far above the target, members of the Federal Open Market Committee, which decides on interest rate moves, aren’t ready to declare victory, waiting to see what future inflation reports say before making another move.

“While I continue to expect that we will need to increase the federal funds rate further to bring inflation down to our 2% target in a timely way, I supported the FOMC's decision last week to hold the target range for the federal funds rate at the current level as we continue to assess incoming information and its implications for the outlook,” said Michelle Bowman, a governor at the Fed, in a speech to bankers in Florida, according to prepared remarks. 

Kathleen O’Neill Paese, interim president of the Federal Reserve Bank of St. Louis, said she favored a wait-and-see approach while staying willing to raise rates again if need be.

“We can afford to await further data before concluding that additional policy tightening is appropriate,” she said in a speech to financial professionals in Indiana, according to prepared remarks. ”However, if progress toward achieving 2% inflation stalls, I believe that the Committee should act promptly to ensure that high inflation does not become entrenched.”

Patrick Harker, president of the Federal Reserve Bank of Philadelphia, advocated keeping the rate flat to gauge the effect high interest rates are having on the economy.

“This economy is proving to be resilient and at times unwilling to bend to the will of economic models, but I believe that the path we are on is the correct one,” he said in a speech at Northwestern University. “I am not going to be swayed easily by a single month’s worth of data.”