Fed Keeps Markets Guessing on Rate Pauses and Cuts – Former Policymakers, Reuters

By Divya Chowdhury and Lisa Pauline Mattackal

The U.S. Federal Reserve is not expected to provide definitive indications about pausing interest rate hikes or implementing cuts, unless there is significant economic downturn or disinflation, according to former central bankers.

In a recent speech at the Jackson Hole Symposium, Fed Chair Jerome Powell hinted that additional interest rate hikes remain possible, even while acknowledging progress has been made on inflation. This has left investors speculating about when the Federal Reserve might either pause its rate hikes or start cutting rates next year.

“If the Fed wants to do its job, it almost surely has to keep in a state where ‘nobody quite knows whether it’s paused or not’,” commented Raghuram Rajan, former governor of the Reserve Bank of India. He added that if the Fed realizes it hasn’t managed to control inflation and needs to raise rates again, it would face criticism. Conversely, if the Fed announces a pause, financial markets are likely to respond positively.

Powell’s presentation at Jackson Hole was considered effective as it kept the bank’s policy options flexible, according to Dennis Lockhart, former president of the Atlanta Fed. “He was subtly hawkish and very pragmatic, offering little guidance on future rate cuts, though he doesn’t rule them out,” Lockhart remarked.

The Federal Reserve’s earlier economic projections indicated one more anticipated rate increase by the end of 2023, with potential rate cuts beginning in 2024. Both Rajan and Lockhart deemed rate cuts unlikely unless there is sustained economic weakness or disinflation. Rajan noted that a significant decline in financial markets could compel the Fed to lower rates, but stressed that such a scenario would need to be “pretty calamitous.”

“They will be looking for evidence that the disinflationary trend is sustainable and assessing whether the economy and employment are moving toward an undesired level of weakness,” Lockhart added.