Fed Pivot can happen after these 5 basic conditions are met: Economist

  • The Federal Reserve faces a high bar before it starts cutting interest rates, according to Comerica Bank.
  • In addition to slower inflation, other conditions must be met, said chief economist Bill Adams.
  • It also included falling housing and rental costs, slower wage growth, lower job openings and an increase in the unemployment rate.

The Federal Reserve needs to wait for several conditions beyond slowing inflation before it can move away from monetary tightening, according to Comerica Bank chief economist Bill Adams.

In a note released late Wednesday, it noted that while inflation has eased in some areas such as house and used car prices, it has risen in “sticky” service prices over the past year.

This increased inflation momentum sets a high bar for the Fed to complete its tightening campaign and an even higher bar for rate cuts, Adams added.

“For the Fed to really turn around, and not just slow rate hikes, it will want to see slower overall and core inflation, declines in home prices and rents, slower wage growth, lower job openings and a possible increase in the unemployment rate . be confident that the slowdown in inflation expected in 2023 does not give way to another jump higher in 2024,” he said.

The note came after the Fed on Wednesday raised benchmark interest rates by 75 basis points for a fourth consecutive meeting, largely meeting consensus expectations.

A new line added to its policy announcement saying the Fed would consider “cumulative tightening” and delays in how monetary policy affects the economy were signs to Adams that the central bank was opening the door to smaller rate hikes and possibly on hiatus early. 2023 with the Fed Funds target between 4.5% and 5%.

But Fed Chairman Jerome Powell’s hawkish tone at a press conference later Wednesday sent stocks tumbling and investors scrambling for cover.

In particular, he noted that the eventual peak in Fed Funds rates may be higher than previously expected as inflation remained persistent.

And a key component of today’s high inflation rate is energy, which Adams said will be included in the Fed’s estimates.

“More immediately, the risk of another spike in energy prices during the winter heating season is another reason why the Fed will want more evidence that inflation is easing before it departs from a rate-hike trajectory,” he concluded.

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