Fed Mouthpiece: The Federal Reserve is poised to raise interest rates next week, but a single rate hike will not solve the problem.
41 minutes ago
Fed mouthpiece Nick Timiraos wrote in a recent article that investors have largely priced in the Federal Reserve’s first interest rate hike in three years next week, with the bigger question being what comes after. Almost no one within the Fed believes a single 25-basis-point hike would be enough to curb inflation. If the Fed decides to raise rates next week, it would signal a judgment that interest rates were previously set at the wrong level, and one hike alone won’t solve the problem. Since the 1990s, the Fed has only implemented one "one-off" rate hike. Warsh said in July that he doesn’t believe the Fed is good at "fine-tuning". Analysts note that a Fed chair skeptical of fine-tuning is unlikely to declare victory after a single 25-basis-point hike. Warsh added last month there isn’t much evidence that lending conditions are constraining economic activity. If the Fed uses this as a reason to raise rates, markets will naturally ask how high rates need to climb. Without a clear explanation, markets may interpret a single rate hike as the start of larger policy action. As a result, investors this week no longer view the September meeting as an isolated event. Markets now expect at least three total rate hikes by June next year, up from the previous forecast of two.
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