Higher fed rates are not totally off the table

WASHINGTON — Investors do not expect the Federal Reserve to raise interest rates again, and officials have made it clear that they see further increases as unlikely. But one important takeaway from recent Fed commentary is that unlikely and inconceivable are not the same thing.

After the central bank held rates steady at 5.3% last week, Fed Chair Jerome Powell delivered a news conference where what he didn’t say mattered.

Asked whether officials might raise interest rates again, he said he thought they probably would not — but he also avoided fully ruling out the possibility. And when asked, twice, whether he thought rates were high enough to bring inflation fully under control, he twice tiptoed around the question.

“We believe it is restrictive and we believe over time it will be sufficiently restrictive,” Powell said, but he tacked on a critical caveat: “That will be a question that the data will have to answer.”

There was a message in that dodge. While officials are most inclined to keep interest rates at their current levels for a long time in order to tame inflation, policymakers could be open to higher interest rates if inflation were to pick back up. And Fed officials have made that clear in interviews and public comments over the past several days.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, on Tuesday said that he was wary about a scenario in which inflation gets stuck at its current level, and hinted that it is possible that rates could rise more.

Michelle Bowman, a Fed governor who tends to favor higher interest rates, has said she remains “willing to raise” borrowing costs if progress on lowering inflation stays stalled or reverses. And Thomas Barkin, president of the Federal Reserve Bank of Richmond, said that he thought that rates were weighing on the economy but that “time will tell” if they were doing so sufficiently.

Officials still roundly expect the economy to slow given today’s rate setting, which they think is weighing on demand as it makes it more expensive for businesses to borrow money to expand and for households to buy on credit. Although progress on lowering inflation has stalled out lately, Fed policymakers have been clear that the most likely outcome at this stage is that they will just keep interest rates at today’s level for some time in order to gradually hit the brakes on growth and bring price increases back down to their 2% target.

Policymakers have also said that although they were determined in 2022 and 2023 to wrestle inflation lower even if doing so came at a steep economic cost, they are now taking a more careful approach. Inflation is down sharply from its 2022 highs. Weighing inflation down rapidly is less urgent for the Fed in light of the moderation, so officials have the freedom to tread cautiously and try to avoid causing a recession.

But although Fed officials are settling in for a pause as they wait for their policy to squeeze the economy enough to vanquish rapid price increases, that stance could change. If inflation begins to cool decisively again, they expect to cut rates. And if inflation surprises them by heading back up, rate increases remain possible.

Fortunately for anyone waiting for lower credit card, auto or mortgage rates — and hoping that borrowing costs won’t shoot up further — most economists do expect inflation to slow in the months ahead, and essentially none expect it to rise.

Inflation has gotten stuck in recent months after coming down sharply last year, in part because housing costs have proved surprisingly stubborn and as insurance costs have picked up. But economists in a Bloomberg survey think that could change starting next week: Fresh consumer price index data is expected to show that overall inflation dipped to 3.4% in April, down from 3.5% in March.