"New Fed News Agency": Fed's stance "significantly shifting," may pause rate hikes in September

In an article published on September 10th, Nick Timiraos, a Wall Street Journal reporter known as the "mouthpiece of the Federal Reserve" and the "new Federal Reserve News Agency," stated that there is a "significant shift" in the Federal Reserve's stance on interest rate hikes. It is possible that they will pause the rate hikes in September and carefully examine the future path of rate increases.

In the article, he wrote:

Some officials still prefer to overtighten because they can always cut rates later. However, other officials now believe that the risks are more balanced. They are concerned that rate hikes could lead to unnecessary economic downturn or trigger another round of financial turmoil.

After the most aggressive rate hike cycle in forty years, the US inflation rate has dropped from 9.1% to 3.2%, significantly easing inflationary pressures. In addition, the labor market is cooling down, with non-farm payroll employment in August dropping from a peak of 517,000 to 187,000, and the unemployment rate reaching a new high since February last year.

After a 25 basis point rate hike in July, most Federal Reserve officials seem to agree on pausing the rate hikes in September. Therefore, the biggest debate now is whether to continue raising rates in November or December. In June, most Federal Reserve officials predicted a need for another 25 basis point rate increase by the end of the year.

The shift in the Federal Reserve's stance can be easily seen from Powell's speech. In August, Powell used the word "could" instead of the stronger "would" to describe whether the Federal Reserve would further tighten monetary policy.

He stated at the Jackson Hole Symposium, "The evidence of stronger growth raising the risk of further progress on employment and inflation is a risk that could call for an earlier removal of accommodation."

Boston Fed President Collins said in a recent speech, "We must now weigh the risk of inflation remaining high in the long term against the risk of an overly restrictive monetary policy stance causing a greater economic slowdown than necessary for price stability. This stage of our policy cycle requires patience."

In August, Atlanta Fed President LaBostic stated that he would prefer to keep rates at the current level next year. "If we exercise appropriate caution, we have the opportunity to minimize the damage on the employment side. That's not to say there won't be damage."

However, some officials still have concerns about inflation and support further rate hikes in the coming months.

Cleveland Fed President Mester said in an interview with the Wall Street Journal last month that overtightening is a risk, but "we have consistently underestimated inflation." "Allowing inflation to persist for a longer period of time does indeed come with costs for the economy."

She said that if the negative impact of such growth proves to be greater than expected, then next year "I would be more willing to lower rates (more quickly)."

Federal Reserve Governor Waller said last week, "If we do believe that a rate hike is needed, I don't think another rate hike necessarily puts the economy into recession." Dallas Fed President Kaplan also recently stated that skipping the rate hike in September "does not mean stopping rate hikes." At the same time, the CME FedWatch Tool indicates that the market sees a September rate hike as almost a done deal, with a probability as high as 93%. The probability of a 25 basis point rate hike in November or December is around 40%.

Bond traders have been increasing their bets on the future rate hike path of the Fed. With yields hovering near the highest levels since before the 2008 financial crisis, U.S. bonds are set to post losses for the third consecutive year.

Leslie Falconio, Head of Taxable Fixed Income Strategy at UBS Global Wealth Management, said, "The CPI data to be released next week (September 13) may provide some additional information on the Fed's possible path." "We expect the Fed not to take action in September. However, while we currently expect them not to act in November either, there is certainly a 50/50 chance."