T. Rowe Price Chief U.S. Economist Blerina Uruci noted that the Fed's latest policy meeting statement leaned slightly hawkish, upgrading its description of economic growth from "solid" to "strong."
In addition, compared with regional Fed bank presidents, a hawkish dissent raised by a Fed governor sent a slightly stronger signal of tightening policy. At the post-meeting press conference, Fed Chair Kevin Warsh, as expected, did not provide forward guidance on the future path of interest rates.
He also reiterated that inflation has still not fallen back to target and reaffirmed his commitment to bringing inflation down to the 2% goal. However, given that some inflation indicators are accelerating and inflation still faces upside risks, the Fed did not fully explain why it chose not to raise rates at its October meeting.
Judging from this week's policy meeting, the Fed appears to be acting too slowly in tightening monetary policy. Markets currently expect the Fed to raise rates roughly every other meeting in the near term, but there is little clarity on the policy path beyond the next two hikes.
Given that the U.S. economy remains resilient and inflationary pressures are building, this gradual rate-hike strategy carries risks. Since the outbreak of the U.S.-Iran war, some upside inflation risks have begun to show up in economic data.
If companies decide to make substantial adjustments to the prices of their goods and services, the Fed's current rate-hike strategy could leave its monetary policy severely behind the inflation picture in the first quarter of 2027. At that point, the Fed may need to catch up urgently and tighten financial conditions at a faster pace, whereas if the authorities had earlier adopted a tougher policy stance in response to upside inflation risks, such aggressive action might not have been necessary.
Combining September economic activity and inflation data, Blerina Uruci's view on Fed monetary policy remains more hawkish than market expectations. She believes that if short-term rates fall in the near term, it would mean the Fed needs to implement even larger tightening measures in 2027.
Comments