Aug 29 (Reuters) – The Federal Reserve is unlikely to give clear signals on whether it will pause rate hikes or consider rate cuts unless there is severe economic weakness or disinflation, formers said central bankers on Tuesday.
Fed Chair Jerome Powell, speaking at last week’s Jackson Hole Symposium, hinted that further rate hikes were still on the table, although he noted progress had been made on inflation. This left investors puzzled as to when the US Federal Reserve might end its cycle of interest rate hikes or if it could start cutting rates next year.
“If (the Fed) is going to do its job, it almost certainly has to be like ‘no one really knows if it’s pausing or not,'” said Raghuram Rajan, former governor of the Reserve Bank of India.
“When it finds that it can’t control inflation and needs to start inflating again, it feels guilty. On the other hand, the moment it says ‘pause’ financial markets will start celebrating,” said Rajan Reuters Global Markets Forum (GMF).
Powell’s Jackson Hole presentation was effective because it gave the bank policy options, said Dennis Lockhart, former Atlanta Fed President.
“He’s been very, very slightly hawkish and very, very pragmatic… he hasn’t really given much guidance in terms of another rate cut, although obviously he’s not ruling it out at all,” Lockhart said.
The Fed’s economic forecasts earlier this year showed another expected rate hike by the end of 2023 and rate cuts from 2024, but both Rajan and Lockhart said cuts were unlikely unless there was prolonged economic weakness or disinflation.
While significant slumps in financial markets would increase pressure on the Fed to cut rates, Rajan said the situation must be “rather catastrophic.”
“They will be looking for evidence that the disinflationary trend is sustainable and that the economy and jobs may be moving to undesirable levels of weakness,” added Lockhart.
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Reporting by Lisa Mattackal and Mehnaz Yasmin in Bengaluru, Divya Chowdhury and Savio Shetty in Mumbai; Edited by Cynthia Osterman
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