The Federal Reserve needs to start talking about slowing down their rapid pace of recent increases in their benchmark interest rate, said San Francisco Fed President Mary Daly on Friday.
The Fed has already raised its fed fund futures by 300 basis points since March, one of the fastest moves in history. This includes three-straight 0.75 percentage point rate hikes, large moves that had previously been considered very rare.
“I think the time is now to start talking about stepping down – the time is now to start planning for stepping down,” Daly said, in a talk at the University of California Berkeley.
The slower pace is important because the Fed doesn’t want to over-tighten, she said, just as it doesn’t want to not raise rates enough to slow inflation.
There is a strong consensus among economists and investors that Fed officials will raise the benchmark rate by the fourth 0.75 percentage point hike at their policy meeting on Nov. 1-2. That is because the Fed signaled such a move, penciling in 1.25 percentage points of rate hikes over the central bank’s last two policy meetings this year.
Because it would be unheard of for the Fed to slow down and then speed up its rate increases, Fed watchers projected a 0.75 percentage point move in November, with any slowdown to come in the last meeting of the year in December. Fed officials seemed comfortable with this interpretation in speeches all month.
Daly seemed to address the point, saying that talking about slowing down “doesn’t mean go in a week.”
In her comments, Daly stressed that slowing down was not the same as stopping rate hikes.
She said estimates the Fed will ultimately raise its benchmark rate to a range of 4.5%-5% “is a very reasonable estimate of where we’ll need to go.”
A report in the Wall Street Journal discussing the potential of a smaller rate hike in December moved markets earlier on Friday.
Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said the talk of stepping down is a sign the Fed wants to move to a “slow and stretch” strategy.
Under this game plan, after one final 0.75 percentage point hike in November, the Fed would step down to half a percentage point hike in December. At the same time the Fed would tack on another quarter-point move in 2023, raising its terminal rate up to a range of 4.75%-5% from the earlier projection of 4.5%-4.75%.
“This approach would allow the Fed to get off the 75-a-meeting hamster wheel while providing a rate policy response to recent hot inflation data,” Guha said.
Economists said the Fed is worried that once they slow down, the market will sense that a rate cut might be closer.
“It would emphatically not represent a full ‘pivot’ on the part of the Fed,” Guha added.
Daly is one of the last Fed speakers prior to the central bank’s November meeting. That’s because the central bankers honor a ten-day “blackout” period with no public comments on interest-rate policy ahead of their key interest-rate decisions.