Fed Sets Course for Milder Interest-Rate Rise in February
Officials could begin weighing whether and when to pause rate increases this spring
4 min
U.S. Federal Reserve officials are preparing to slow interest-rate increases for the second straight meeting and debate how much higher to raise them after gaining more confidence inflation will ease further this year.
They could begin deliberating at the Jan. 31-Feb. 1 gathering how much more softening in labour demand, spending and inflation they would need to see before pausing rate rises this spring.
In recent public statements and interviews, Fed officials have said slowing the pace of rate increases to a more traditional quarter percentage point would give them more time to assess the impact of their increases so far as they determine where to stop.
Officials called attention to how it takes time for the full effect of higher rates to cool economic activity when they stepped down to a half-point rate rise in December, following four consecutive increases of 0.75 point.
“And that logic is very applicable today,” said Fed Vice Chair Lael Brainard in remarks last week. Raising rates in smaller increments “gives us the ability to absorb more data…and probably better land at a sufficiently restrictive level.”
To combat high inflation last year, the Fed reeled off the most rapid series of rate rises since the early 1980s, raising its benchmark federal-funds rate by 4.25 percentage points. A quarter-point increase next month would bring the rate to a range between 4.5% and 4.75%.
Most Fed officials projected in December the rate would rise to a peak between 5% and 5.25%. That would imply two more quarter-point increases after the likely bump next month. Investors in interest-rate futures markets expect the Fed to make two more quarter-point increases—at the coming meeting and again at the Fed’s subsequent meeting in mid-March, according to CME Group.
The Fed raised rates seven times last year. The likely decision to approve a smaller increase in February reflects officials’ growing confidence that the economy is responding to their efforts to curb demand and bring down inflation.
In recent weeks, government data and business surveys have pointed to a steeper drop-off in manufacturing activity and new orders for service-sector firms as well as a pullback in consumer spending on goods.
The central bank’s rate increases are aimed at slowing inflation by reducing demand, “and there is ample evidence that this is exactly what is going on in the business sector,” Fed governor Christopher Waller, an early and vocal advocate for aggressive rate rises last year, said on Friday. Mr. Waller said he would favour a quarter-point rate rise at the coming meeting.
The Commerce Department is set to release this week the December figures for the Fed’s preferred inflation gauge, the personal-consumption expenditures price index. Excluding food and energy prices, the so-called core PCE index likely rose 4.5% from a year earlier and at a 3.1% three-month annualised rate in December, Ms. Brainard said.
Officials could use their post meeting statement on Feb. 1 to indicate they expect to continue raising rates as they probe where to pause. But they are unlikely to provide precise guidance because coming decisions will depend heavily on new data about the economy.
Some have also suggested that even if they hold rates steady this summer, they will indicate they remain more likely to lift rates than to cut them. After the Fed pauses, “we’ll need to remain flexible and raise rates further if changes in the economic outlook or financial conditions call for it,” said Dallas Fed President Lorie Logan in a recent speech.
At the coming meeting, officials could deliberate two important questions: How long does it take for the full effects of the Fed’s rate rises to influence hiring and overall economic demand? And how much could inflation slow due to other factors such as easing supply-chain bottlenecks or lower costs of fuel and other commodities?
Some could call for delaying any pause if the economy doesn’t weaken much in the months ahead. They think the time between when the Fed raises rates and when they slow the economy is relatively short and the economy will soon feel the worst of any policy-induced slowdown.
Others could argue for a somewhat earlier pause, believing the effects take longer to play out or could be more potent.
Divisions have surfaced. St. Louis Fed President James Bullard said recently he would prefer a larger half-point rate increase at the coming meeting because he doesn’t think rates are high enough to thoroughly beat inflation. “You’d probably have to get over 5% to say with a straight face that we’ve got the right level,” he said in an interview. “Why not go to where we’re supposed to go?…Why stall and not quite get to that level?”
Several of his colleagues have argued for greater flexibility to see if the easing of pandemic- and war-related disruptions brings inflation down more rapidly. As evidence builds that higher rates are working as intended, “why would we try to…really put the clamps down on the economy and really risk losing the good things we have going, like the labor market?” Philadelphia Fed President Patrick Harker said last week. “I just don’t see doing that.”
Fed officials have long expected inflation to fall as supply-chain bottlenecks and commodity-market disruptions eased, but inflation instead rose through the first half of 2022 before moving sideways, according to the Commerce Department’s gauge.
Inflation has declined over the past three months due largely to falling fuel prices and prices of goods, such as used cars. There are signs soaring rents and other housing costs are set to cool notably amid a sharp slowdown in demand, though that isn’t expected to show up in official inflation measures until later this year.
As a result, Fed Chair Jerome Powell and several colleagues have shifted their focus recently toward a narrower subset of labor-intensive services by excluding prices for food, energy, shelter and goods. Inflation in that category has been around 4.4% on both a 12- and three-month basis, up from around 2.3% on average between 2010 and 2019.
Officials believe that category could reveal whether higher wage costs are passing through to consumer prices.
If services inflation is high because paychecks are rising in lockstep with prices, as occurred during the 1970s, then Fed officials would want to see hiring slow more.
But if price increases for services such as restaurant meals, car insurance and airfares instead reflect the ripple, or “pass-through,” effects of some of the global dislocations that are now reversing, services inflation might moderate faster and without as significant a weakening of labor markets.
The recent inflation slowdown, together with the lagging impact of the Fed’s rate rises that could continue to slow the economy, “may provide some reassurance that we are not currently experiencing a 1970s-style wage-price spiral,” said Ms. Brainard.
Fed officials last month revised higher their projections for inflation this year in part due to fears that wage growth was running too high. Signs since then that wage growth is slowing could weigh prominently in the debate over how soon to pause.
Officials will have two more months of several widely watched economic indicators, including on hiring and inflation, before their March 21-22 meeting. They pay close attention to a detailed measure of worker compensation called the employment-cost index, which is set for release on Jan. 31.
The report could offer further confirmation that wage growth slowed at the end of last year.
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People spend a lot of money on all sorts of things, only to later ask themselves: Why?
5 min
While it may be true that money can’t buy happiness, that doesn’t stop people from trying.
And then wishing they hadn’t.
Many of us have had a big-ticket expenditure that we later come to regret. Maybe it’s something meant to convey status, which we realise later did nothing of the sort. Maybe it was to fulfil dreams of a luxury lifestyle, only to discover that we’ve bought a bottomless money pit.
We asked Wall Street Journal readers to share their stories of pricey purchases that ultimately led to disappointment. Below are some of their stories and reflections—with some free advice to their younger selves.
The wristwatch of his dreams
“It was back in day of wingtip shoes, white shirts and red ties,” says Bryan Desloge, who began his career at IBM in 1984. And like many rookie employees, Desloge wanted to fit in. “I bought suits. I took my earring out. I cut my hair and I registered in the Republican Party,” he says. To complete the look, he paid over $7,000 for the wristwatch of his dreams—a Rolex Submariner. It was a hefty sum, considering he was making roughly $18,000 a year.
Now 64 and retired, Desloge says his younger self saw the stainless-steel watch as a status symbol. “The older guys had nice dress watches already, while I wore a Casio or a Timex.” Just two years after buying the Rolex, however, Desloge realised the timepiece was impractical for him. “The Rolex is great, but I don’t want to look at a clock face,” he says, “and the glow-in-the-dark hands are hard to read at night.”
Desloge, who lives in Tallahassee, Fla., recently tried to give the Rolex to his son, who turned him down. So it remains tucked away in favor of a Garmin smartwatch, which has a fitness tracker, alerts and email, among other features. Purchased for about $500, the Garmin can multitask in ways his Rolex cannot. “I will probably wear that watch for the rest of my life,” Desloge says.
Cabin fever
The family called it “the little brown house,” says Michael Kotas of his vacation cabin in the mountains overlooking Tucson, Ariz. In 2005, Kotas and his wife paid $120,000 for the 1950s cabin, and it needed a lot of work.
“We bought it from an older couple, who had dark rugs and wood paneling,” says Kotas, who is now in his mid-60s and retired from a job in technology sales. He redid the cabin “with a cool Manhattan vibe,” updated the electrical wiring and corrected a flooding issue in the basement. In all, Kotas estimates he spent $60,000 in upgrades.
But his financial headaches were far from over.
Even though Kotas owned the cabin, the federal government owned the land it sat on, since it was located within the Coronado National Forest. Leasing the land cost $800 a year when the cabin was purchased, but eventually grew to $3,600 a year by the time it sold.
During that time, two fires came within 100 yards of the cabin, jacking up Kotas’s fire-insurance premiums. Then, a species of bark beetle attacked ponderosa pines there, and the Forest Service required cabin owners to remove infested trees around their property, costing $1,000 to $1,200 a pop. “I counted all my trees around my house and thought, ‘I can’t afford this.’ ”
Over time, Kotas’s children didn’t want to go to the cabin anymore, saying “there was nothing to do,” he says. “We ended up spending about five nights a year there for the last several years.” Kotas, whose year-round home also is in Tucson, came to the realisation that he wasn’t getting his money’s worth. “It became an albatross,” he says.
The tipping point came when a man parked his truck just 100 feet from the cabin and lived out of his vehicle on the side of the road. Kotas sold the cabin in 2022 for $195,000.
“I would probably never buy a vacation home again,” he says. “It was a tough lesson to learn. I wish the [new] buyers well, but all I can say is, ‘Good riddance!’ ”
RV to nowhere
After retiring from a career in ophthalmology, Gordon Preecs bought a large pickup truck in 2013 and a 22-foot travel trailer in 2017 with the dream that he and his wife, Connie Preecs, would visit national parks around the country. Combined, the new vehicles cost around $50,000.
Living in Seattle at the time, the couple started out by taking the RV on short trips, such as an event for woodcarvers in Washington state. It didn’t take long for them to feel pinched in a 120-square-foot RV. “I thought we’d have our own hotel” with an RV, says Preecs, who is now 75 and living in Round Rock, Texas. “But we had to just shove things in there. The kitchen counter was hand’s breadth wide, and the bathroom was like a phone-booth shower. If I dropped the soap, I couldn’t pick it up.”
Three years after purchasing the trailer, Preecs and his wife relocated to Texas to be closer to their grandchildren. Still, they were able to visit Grand Teton and Yellowstone national parks in the Northwest. That’s when they felt the financial pinch of RV ownership.
“At 6 miles per gallon and $60 to $80 a night at RV parks, the expenses really added up,” he says. “We found it was an inefficient way to travel.” Some of the RV parks are located in funky, backwater places, he says. And setup and breakdown at every stop became a hassle. “You want to be free, but you’re not.”
In 2020, they sold the trailer, which had less than 5,000 miles of use, and the pickup for a combined $32,000. With the proceeds, Preecs bought a Tesla.
Outfitted and outwitted
As a vintner in California, much of Pam Starr’s work takes place outside among the grape vines. “I live in jeans and winemaker vests, T-shirts and sometimes boots,” says the 63-year-old. “So I can tear my clothes on a vine or get barrel slime on me” and it doesn’t really matter.
A few years ago, a well-heeled friend with an eye for fashion convinced Starr, who lives in Napa, to join her in San Francisco for a meeting with her couturier—a person who creates luxury clothing to the client’s specifications. The friend had told Starr that she wouldn’t have to buy anything, but this particular couturier was very persuasive, Starr recalls.
For example, the couturier held up a gauzy swimsuit coverup with white sequins and said, “You have to wear this swimsuit coverup by the pool.” Starr paid $1,800 for a custom coverup, but later it hit her: “I don’t wear a coverup when I’m at the pool because I’m actually in the pool.” To this day, it has never been worn. Starr says she spent another $1,800 for an off-the-shoulder silk shirt with three-quarter length sleeves.
The quality of the clothing was low, Starr says. “That silk shirt turned out to be my most disappointing piece,” she says. It didn’t clean well, and hasn’t retained its shape. Many of the pieces she purchased haven’t held up well, she says, even though she rarely wears them. “Out of the 15 items I had made for me, I loved maybe three,” Starr says. “That’s more than $20,000 worth of clothes, and I should have gotten more out of them.”
If she could go back in time, Starr says, she would say to herself, “ ‘Listen, Pam. Pick two things and start slowly. If you like them, you can expand into other things.’ ” Also, she would pause to ask herself how often she would actually wear the clothing.
“Because of a friend, I ended up in a couture shop,” Starr says. “In that world, it’s uncharted territory for me. The couturier pulls you in really hard.” Knowing what she knows now, Starr says, “if I needed someone to design a gown for me, I wouldn’t go back there. I would go to a seamstress locally.”
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Consumers are going to gravitate toward applications powered by the buzzy new technology, analyst Michael Wolf predicts
