News

The Federal Reserve Takes a Cautious Approach to Interest Rates

James L. Flint

• October 18, 2023

Fed Governor Christopher Waller has emphasized the need for patience and observation when it comes to the Federal Reserve's decision on interest rates. In a recent speech in London, Waller indicated his support for maintaining the current interest rates at the central bank's upcoming policy meeting in two weeks.

Assessing the Economic Landscape

With the intention to focus on their interest-rate decision on November 1st, Fed officials will cease communication with the media starting Friday. However, before the blackout begins, Fed Chairman Jerome Powell will share his insights on the economic outlook.

The Federal Reserve has made significant strides in tackling inflation by gradually increasing its benchmark interest rate to a range of 5.25%-5.5% over the past 19 months. Previously, the rate had remained close to zero during the pandemic. The central bank had initially foreseen one more 25 basis point hike by the end of this year.

Anticipating Future Moves

Traders in derivative markets have speculated that a interest rate hike is more probable at the Fed's December meeting rather than immediately after the closed-door discussions in two weeks.

In his London speech, Waller discussed two potential scenarios that could unfold in the coming months. The first scenario involves a slowdown in the economy, leading to a decrease in inflation and allowing the Fed to maintain steady interest rates. On the other hand, if the economy continues to flourish, the Fed may need to raise rates further to ensure that inflation remains at its target of 2%.

"At this moment, it is too early to determine" which scenario will materialize, Waller acknowledged.

Waller also highlighted the considerable tightening of financial conditions since July, accompanied by a rise of approximately 90 basis points in the 10-year Treasury note yield. This development may have a potential impact on consumer spending.

"While I have been anticipating a slowdown in spending due to tightening financial conditions, I have been consistently surprised by the resilience of consumer spending. Therefore, I will exercise patience and monitor the data to gain insight into spending patterns," Waller stated.