The best way to start this short analysis about the communication and the next steps by the Fed is by quoting the legendary Alan Greenspan:
'If I've made myself too clear, you must have misunderstood me.
Given the proximity of the next FOMC meeting, when the market expects the last hike in this [intense] cycle that started last March, the challenge now is to anticipate the wording used by the committee to signal the desire to pause. Of course, in the press conference, Powell will have more opportunity to deliver the message, but given the level of uncertainty, he probably won't completely close the door. The main objective here is not to understand the entire environment in past pauses, given different contexts, but just to understand that in terms of formal communication, especially written communication, we should not expect a clear message from the Fed in terms of a desire to stop the cycle.
Having said that, in the last meeting, they already tried to give some hints or indications about the pause, with statements already using some "flexible" words about the next steps of the cycle, like:
“The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive”. (FOMC Statement Mar/2023)
Powell himself highlighted during the press conference the words "some" and "may," using some degree of uncertainty.
Let's start with the last pause by the Fed in late 2018. Basically, in December, the FOMC's statement pointed out that
“some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term”. (FOMC Statement Dec/2018)
So, as you may think, that is a Committee prepared to continue to hike rates in the coming meetings, right? Right. But that's precisely what doesn't happen, and at the beginning of 2019, we saw the pause of the cycle, even with not full confidence in that decision, given the statement message at that time:
“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcome. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.” (FOMC Statement Jan/2019)
It's pretty interesting the change of view in only 45 days that, of course, reveals a weaker growth expectation but not fast enough to promote this fast update in the monetary policy outlook. That is the first communication that won't provide a clear message for a pause, but there is more when we look to the past.
In June 2006, during the hike cycle before the Great Financial Crisis, the FOMC revealed to us concern about the inflation outlook, which stood still even after the pause decision. So, we have a precedent in history that the Fed can pause with inflation higher than desired. Of course, at that moment, they only had the "price stabilization" target, and now they have the 2% in the long term, but they certainly can use the long-term expectation (Breakevens, Survey of Professional Forecasters, and even Univ. Michigan), not that far from the target. In terms of wording, the Fed basically leaves the door open for more hikes - there is no clear sign of a pause, even with all the conditionality that statement gives.
“the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.” (FOMC Statement Jun/2006)
In August, despite the committee acknowledging that inflation was high, they played the "lag effects of monetary policy" card (as they are doing now) to justify the pause. There were concerns about the momentum of growth which created room for a change in the FOMC stance. Looking at the previous communication, there was no clear indication of a pause.
“Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices. Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.” (FOMC Statement Aug/2006)
And last but not least, we have the 2000 cycle, which preceded a recession. The outlook was still one of high inflation, which would affect long-term goals.
“The Committee is concerned that this disparity in the growth of demand and potential supply will continue, which could foster inflationary imbalances that would undermine the economy's outstanding performance. Against the background of its long-term goals of price stability and sustainable economic growth and of the information already available, the Committee believes the risks are weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future” (FOMC Statement May/2000)
On the other hand, in the next decision, in June, the option to maintain the interest rate reflected concerns about the slowing of growth, despite the pressure on core inflation, suggesting that the reaction function took into account more than just inflation.
“The Federal Open Market Committee at its meeting today decided to maintain the existing stance of monetary policy, keeping its target for the federal funds rate at 6-1/2 percent. Recent data suggest that the expansion of aggregate demand may be moderating toward a pace closer to the rate of growth of the economy's potential to produce. Although core measures of prices are rising slightly faster than a year ago, continuing rapid advances in productivity have been containing costs and holding down underlying price pressures.” (FOMC Statement Jun/2000)
This analysis is far from exhaustive, especially considering a monetary policy framework that has been refined over time, particularly with the introduction of press conferences and a clearer inflation target from 2012.
On the other hand, the idea here is to reinforce the fact that the Fed doesn't need to signal that it's actually at the last interest rate hike meeting to actually stop raising rates at the next meeting. One of the signals in this regard is the Summary of Economic Projections (SEP) itself, which indicates a rate of 5.1% in 2023 - in other words, just one more rate hike and then a pause. Let's see.
