The debate over interest rates at the Fed is shifting

(Bloomberg) — As Federal Reserve officials near the end of their tightening campaign, the debate is shifting from how high interest rates need to be to how long they should stay high.

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Some officials play down another potential rate hike, saying the most important thing is that they plan to keep rates at restrictive levels.

“I think we’re very close to the interest rate peak,” John Williams, president of the Federal Reserve Bank of New York, told the New York Times this month. “And the question will really be — once we have a good understanding of that — how long will we need to keep the policy in a restrictive situation.”

Economists at Goldman Sachs Group, including Jan Hatzios and David Mericle, expect the Fed to start cutting interest rates by the end of June, they wrote in an Aug. 13 note.

A Bloomberg survey of 45 economists conducted July 13-18 found respondents divided on when the first cut would occur. More than a quarter see a cut in January 2024, while the group average sees the first cut at the next meeting in March, with interest rates falling to 4.75% by June 2024.

Tim Dowie, chief US economist at SGH Macro Advisors, said officials have not yet made it clear how long they plan to keep interest rates stable, in part because they haven’t figured it out themselves. It’s a question some policymakers can address when they gather at the Federal Reserve’s annual Jackson Hole symposium in Kansas City this month.

“The conversation that we’re seeing between the presidents now, between the speakers at the Federal Reserve, is going to mirror what will likely be Jackson Hole side conversations,” Doi said. “We’re moving on to the next part of this story.”

Median economic projections released in June showed that most Fed officials expected interest rates to rise by at least another quarter point, in addition to the rate hike approved in July. Forecasts also show that policymakers expect to cut rates to 4.6% by the end of 2024, according to their median forecast, but it’s not clear when those cuts will begin.

Investors largely expect the Fed to hold rates steady when they meet Sept. 19-20, and see a one in three chance of a quarter-point hike in November, according to pricing in futures markets.

Officials are reluctant to limit their options until inflation data shows that price pressures are definitely easing. Reports reflecting stable jobs and strong economic growth have reduced the odds of a recession, but also threaten to accelerate price growth.

“I don’t think Powell is ready to completely close the door on that latest hike,” said Elaine Meade, a Duke University economics professor and former senior member of the Federal Reserve.

However, officials have begun to discuss informally how long they will hold prices high until they can begin to discuss the trade-offs they will need to factor in. Once the committee agrees that they are done with the hike, she said, Powell will work with officials on the language that will eventually make its way into the policy statement.

“They need to have those conversations today so they’ll be ready when they get to tomorrow,” Mead said. “They always anticipate what the next thing on their agenda might be.”

–Help from Reade Pickert.