If the Federal Reserve goes ahead and raises its benchmark rate Wednesday by 0.75-percentage point, as markets now expect, one of the biggest questions will center on what changed since the first week of June, when many members of the rate-setting Federal Open Market Committee signaled plans to raise rates at this meeting by a half percentage point.
Officials have had two disappointing pieces of data since then: last Friday, the consumer price index showed inflation worsened more than expected. And recent consumer survey readings on inflation expectations, which are widely watched by economists because they believe such expectations can be self-fulfilling, have increased.
So is that enough for the Fed to call an audible and depart its recent and unusually precise guidance? One issue is that in recent months, the Fed has charted a policy course that initially appeared to central bank officials to be aggressive, “but then shortly after the meeting, [the Fed] appears to be behind the curve,” said Ellen Meade, a former senior Fed adviser, in an interview Tuesday. “So one way to get out in front this time around is to tee up a 75.”
Consider what happened to the Fed late last year. In December, the Fed sped up its plans to phase down, or taper, asset purchases. Fed Chairman Jerome Powell explained after the meeting that during the pre-meeting “blackout” period before the November meeting, when the Fed announced its initial tapering strategy, there was a wage growth report that he found unsettling.
Mr. Powell said he thought initially about speeding up the taper, but he opted against doing so because they hadn’t “socialized” this more-aggressive plan with markets. In the weeks after the meeting, inflation and employment data made him essentially regret the decision, and so officials telegraphed plans to speed things up three weeks ahead of the December meeting.