Federal Reserve Vice Chair Lael Brainard says the pace of rate hikes will slow, will focus on more data.

The Vice Chair of the Federal Reserve, Lael Brainard, stated in an interview with Bloomberg on Monday that the Fed may soon slow down its rate hikes appropriately. She also emphasized the importance of Fed policy relying on data, and before the announcement on 12/14, members will submit their new forecasts based on more data.

The Federal Reserve raised interest rates by three notches on 11/3, adjusting the target range for the federal funds rate to 3.75%-4%, the highest level since January 2008 and the fourth consecutive hike of three notches this year.

Regarding the rapid rate hikes, Brainard mentioned:

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There may be a lag in the response because this accumulated tightening policy takes some time to materialize. Therefore, adopting a more cautious and data-dependent pace makes sense to ensure effective inflation reduction over time.

She also emphasized the importance of Fed policy relying on data. Before the announcement on 12/14, members will submit their new forecasts based on more data.

Brainard pointed out that recent CPI data has started to decline, and the pace of wage growth has also begun to slow down. These preliminary data are reassuring, but with further tightening, risks will become more two-way. Therefore, members are trying to balance these factors, but she still emphasizes the Fed's 2% inflation target mentioned multiple times. The next indicator data to be announced will be the PCE index.

Focusing on the PCE Index

Personal Consumption Expenditures Price Index (PCE) is data released monthly by the U.S. Bureau of Economic Analysis (BEA) similar to the Consumer Price Index (CPI), primarily aimed at measuring "price changes" and serving as an indicator of inflation in the United States. Due to its broader scope compared to the CPI, PCE has been the basic data for the Federal Reserve to monitor inflation since 2000.

As shown in the chart below, the PCE has declined from a year-on-year rate of 7.0% in June to 6.2% in September. The Cleveland Fed also provides daily real-time forecasts, with the latest data on 11/14 showing 5.87%, indicating a continued decrease in inflation. The next release date for the PCE Index by the U.S. Bureau of Economic Analysis is on 12/1.

Expectations for Future Interest Rate Hikes

According to the latest data from the CME FedWatch by CME Group, the market expects an 80.6% probability of a two-digit interest rate hike in the next meeting and a 19.4% probability of a three-digit interest rate hike. This probability was evenly split a week ago. The likelihood of the benchmark interest rate exceeding 5% by mid-2023 has dropped to below 50% following the rate decision on 11/3, which was over 60%.