Fed policymakers parse inflation data for signals on rate path

By Ann Saphir and Michael S. Derby

(Reuters) -U.S. central bankers are preparing for their last policy-setting meeting of the year by diving deep into inflation data for signals on whether they have pushed interest rates high enough.

The evidence, to many of them, is that they probably have.

"Monetary policy is in a good place for policymakers to assess incoming information on the economy and financial conditions," Cleveland Fed President Loretta Mester said on Wednesday.

One of the Fed's more reliably hawkish voices, Mester has said for months she feels one more rate hike would likely be needed by year end to get inflation on track for the Fed's 2% target. Notably, Wednesday's speech did not contain that line.

The Fed has kept its policy rate unchanged in the 5.25%-5.50% range since July, and after the last meeting over Oct. 31-Nov. 1, Fed Chair Jerome Powell said he is not yet confident policy is restrictive enough.

Fed Governor Christopher Waller, a policy hawk like Mester, on Tuesday delivered a similar assessment. "I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%," he said.

One reason for their confidence: wage pressures have eased, with average hourly earnings growing just 3.2% in recent months. That moderation, from 4.1% previously, should help slow inflation in the labor-intensive service industries, Waller said Tuesday. Another reason: falling rents are expected to drive down housing services inflation.

Indeed, Waller said, if the inflation decline continues for several more months, rate cuts could be in order to keep policy from becoming overly tight.

That said, neither Waller nor Mester say they feel the verdict on inflation is fully in. Both say they'll be watching the data closely and that rates may yet need to rise.

And some of their colleagues are more skeptical.

"I'm still in the 'looking to be convinced' category, rather than the 'convinced' category," Richmond Fed President Thomas Barkin said on Wednesday, on whether inflation is on a firmly downward path, adding that he wants to retain the option of doing more on rates if inflation flares back up.

Strong economic growth will continue to encourage businesses to try to raise prices, Barkin said at a CNBC CFO Council event. Polled after his talk, a majority of the audience said that's exactly what they planned to do next year; none said they planned to cut prices.

On Wednesday the Fed's Beige Book, a compendium of survey-based regional data meant to give policymakers a close-to-the-ground look at economic conditions ahead of each rate-setting meeting, offered a slightly different take.

"Some firms noted that pricing power was reduced by weakening demand and competition," reported the Cleveland Fed, which said the regional economy had contracted slightly in recent weeks.

The Dallas Fed, one of the few Fed banks reporting its regional economy expanded since last month, noted that price pressures were above average in the service sector, but modest in other sectors, adding that "outlooks worsened...with numerous contacts citing geopolitical instability and high interest rates as headwinds."

Policymakers will get a fresh read on inflation on Thursday, with the publication of the October personal consumption expenditures price index.

Economists polled by Reuters estimate it rose 3% from a year earlier, down from 3.4% reported in September. Inflation peaked at 7.1% in June 2022.

Atlanta Fed President Raphael Bostic, who has for months said the Fed policy rate at 5.25%-5.50% is high enough, said Wednesday he feels data backing that view is getting clearer.

"There’s no question the rate of inflation has slowed materially over the past year-plus, and thus far we have avoided a disruptive surge in unemployment that often accompanies a steep slowdown in price increases," he said. "At the same time, I don’t think we’ve seen the full effects of restrictive policy, another reason I think we’ll see further cooling of economic activity and inflation."

(With reporting by Lindsay Dunsmuir, editing by Deepa Babington)