Fed Officials Hint That Rate Increases Are Over, and Investors Celebrate

Federal Reserve officials appear to be dialing back the chances of future interest rate increases, after months in which they have carefully kept the possibility of further policy changes alive for fear that inflation would prove stubborn.

Several Fed officials — including two who often push for higher interest rates — hinted on Tuesday that the central bank is making progress on inflation and may be done or close to done raising borrowing costs. Economic growth is cooling, reducing the urgency for additional moves.

Christopher Waller, a Fed governor and one of the central bank’s more inflation-focused members, gave a speech on Tuesday titled “Something Appears to Be Giving,” an update on a previous speech that he had titled “Something’s Got to Give.”

“I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy,” Mr. Waller said. “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.”

Michelle Bowman, another Fed governor who also tends to be inflation-focused, said that she saw risks that factors like higher services spending or climbing energy costs could keep inflation elevated. She said that it was still her basic expectation that the Fed would need to raise rates further. Even so, she did not sound dead-set on such a move, noting that policy was not on a “preset course.”

“I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation down to 2 percent in a timely way,” Ms. Bowman said.

Taken together with other recent remarks from Fed officials, the latest comments offer an increasingly clear signal that central bank policymakers may be finished with their campaign to increase interest rates in a bid to slow demand and cool inflation. Interest rates are already set to a range of 5.25 to 5.5 percent. The Fed’s next meeting will take place on Dec. 12-13, and investors are overwhelmingly betting that the central bank will hold rates steady, as policymakers did at their last two meetings.

Investors appeared buoyed by the Fed officials’ comments. Higher interest rates raise costs for consumers and companies, typically weighing on markets. The two-year Treasury yield, which is sensitive to changes in investors’ interest rate expectations, fell noticeably on Tuesday morning. Yields fall as prices rise. The move initially provided a tailwind to the stock market, helping lift the S&P 500 from its earlier fall to a gain of 0.3 percent, before the rally eased and the index drifted lower again.

Fed officials have been nervously watching continued strength in the economy: Gross domestic product expanded at a breakneck 4.9 percent annual rate in the third quarter. The concern has been that continued solid demand will give companies the wherewithal to continue raising prices quickly.

But recently, job growth has eased and consumer price inflation has shown meaningful signs of a broad-based slowdown. That is giving policymakers more confidence that their current policy setting is aggressive enough to wrestle price increases fully under control.

Still, as both Mr. Waller and Ms. Bowman made clear, Fed officials are not yet ready to definitively declare victory — data could still surprise them. And while a recent run-up in longer-term interest rates had been helping to cool the economy, the move has already begun to reverse as investors predict a gentler Fed policy path.

The 10-year Treasury yield, one of the most important interest rates in the world, has fallen drastically over the past month after shooting up in previous months, curtailing a sell-off in the stock market and lifting investor optimism. But higher stock prices and cheaper borrowing costs could prevent growth and inflation from slowing as quickly.

“The recent loosening of financial conditions is a reminder that many factors can affect these conditions and that policymakers must be careful about relying on such tightening to do our job,” Mr. Waller said on Tuesday.