The Fed Wants to Quash Inflation. But Can It Do It More Gently?

Federal Reserve officials have raised rates five times this year as they try to beat back the worst inflation in 40 years, and the past three moves have been especially rapid. That has prompted Wall Street and policymakers to contemplate when the Fed might start to slow down.

Jerome H. Powell, the Fed chair, has signaled that moving less rapidly will be appropriate at some point in the future, though he has declined to put a date on when that might begin. On Thursday, Lisa D. Cook, one of the Fed’s newest governors, echoed that stance, saying that “at some point” the central bank will decide to “slow the pace of increases while we assess the effects of our cumulative tightening on the economy and inflation.”

Based on the central bank’s statements and economic projections, markets are betting heavily that the pace will not step down until December. But a debate is beginning to firm up ahead of the central bank’s meeting in early November: Some officials are open to a potential slowdown as soon as the meeting next month, while others believe that the central bank needs to push ahead with very rapid policy adjustments as it races to control inflation.

Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said she could potentially support a half-point move at the central bank’s meeting next month. While still a larger increase than in normal times, a half-point move would be less aggressive than the three-quarter-point change the Fed made at each of its last three meetings.

Ms. Daly is less aggressive than the majority of her colleagues, favoring one percentage point of further rate increases before the end of the year — less than the at least 1.25 percentage points that most people on the committee view as warranted.

“I think we don’t need to signal that we’re resolute anymore; I think people really understand that we’re resolute,” Ms. Daly said during an interview with The New York Times this week. “I am very open to stepping down the pace. But the data will help me determine whether I’m supportive of 75 followed by 25, or whether I’m supportive of 50 followed by 50.”

Christopher Waller, a Fed governor, said on Thursday that inflation had not shaped up the way he would want “to support a slower pace of rate hikes” than the Fed had previously projected, and argued that a few more data points were unlikely to change his mind.

But he seemed to nod to the possibility that the Fed will have a hearty discussion over whether it should make a half-point or a three-quarter-point increase at its coming gathering.

Based on the Fed’s latest projections, “participants expected an additional 100 to 125 basis points of tightening by the end of the year, which means either a couple of 50-basis-point hikes at our remaining two meetings, or 75 basis points in November and 50 basis points in December,” Mr. Waller said. “I imagine we will have a very thoughtful discussion about the pace of tightening at our next meeting.”

A spate of data will be released before the Fed’s next meeting, which will take place Nov. 1-2. The Fed will receive a fresh employment report on Friday and new Consumer Price Index data next week. Measures of economic strength, including housing market information and retail data, will also offer a window into whether growth is losing momentum in a way that might allow price gains to moderate.

Those numbers could push officials toward more of a consensus, or divide them further. While Ms. Daly sounds open to an imminent slowdown as the Fed tries to balance the risk of cooling the economy enough with the threat of clamping down too much, she is one of 19 people who discuss monetary policy at every central bank meeting — 12 presidents and seven governors. Presidents rotate in and out of voting seats, and she does not have a vote on monetary policy this year.

Some of Ms. Daly’s colleagues have signaled that another big move would be appropriate in November unless the data shows a notable improvement on inflation. Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, has expressed that view, for instance.

“Inflation remains too high, and our policy stance will need to move into restrictive territory if inflation is to come down expeditiously,” Mr. Bostic said on Wednesday. Still, he added that “incoming data — if they clearly show that inflation has begun slowing — might give us reason to dial back from the hikes of 75 basis points that the committee implemented in recent meetings.”

Mr. Bostic said this week that the policy rate should rise to between 4 and 4.5 percent by the end of the year, which could mean either a three-quarter-point move and then a half-point move or two half-point moves.

And Thomas Barkin, president of the Federal Reserve Bank of Richmond, said in an interview that while he had not made up his mind about what size move would be appropriate in November, investors risked getting too caught up on individual data points.

The picture has not changed much since the Fed’s September meeting, he said: Inflation is stubborn and broad-based, supply chains are taking time to heal, and workers remain scarce. The trajectory for demand remains “jumbled,” he said.

Whether the Fed can achieve a soft landing “is not the question that I’m focused on — the question that I’m focused on is: Is there a path to get inflation back to target?” Mr. Barkin said. “Of course it would be preferential to have that done with the minimum amount of stress. But I think the goal is to get inflation down.”

Ms. Cook, the Fed governor, said during a Thursday speech that she had been supportive of moving the policy rate up quickly at a time when inflation was proving relentless.

“With risks to inflation forecasts skewed to the upside, I believe policy judgments must be based on whether and when we see inflation actually falling in the data, rather than just in forecasts,” Ms. Cook said. “It is important to consider whether inflation dynamics may have changed in a persistent way, making our forecasts even more uncertain.”

Markets are still betting heavily on a three-quarter point move in November, based on pricing. They then expect the Fed to slow its increases to half a point in December, roughly matching the rate path implied in the central bank’s latest Summary of Economic Projections.

But there have been different phases in monetary tightening — and the current one is more subject to change. Earlier this year, the central bank was trying to raise rates from a very low level, but policymakers think they are now above the dividing line between policy that helps the economy and one that hurts it, which is known as the “neutral” rate.

Now that every move is a step toward further restricting the economy, Fed officials are putting more emphasis on incoming data and are making decisions on a meeting-by-meeting basis. If they raise rates too much, they could find that they have overdone it months or years from now, once the full effects of today’s moves take hold.

Until recently, central bankers were trying to fight a different problem: the risk that they would do too little. Markets drastically dialed back expectations for Fed action after a news conference that Mr. Powell gave in July, which meant that money became easier and cheaper to obtain, working against the central bank’s economy-constraining goals.

Central bankers responded in force, explaining clearly that they planned to raise rates more and hold them at a higher level until they have made progress toward vanquishing inflation.

But markets now expect the Fed to stick to the aggressive path it has laid out in its economic projections. As a result, that forceful messaging may be on the brink of changing — or at least sounding less unanimous.

“I don’t think we need the signal value of resolute anymore,” Ms. Daly said this week. “If anything, we might need the signal value of data dependence.”

Still, that does not mean that the central bank will consider pausing, as some investors had hoped after market gyrations in Britain and as the risks of a global recession have increased. Mr. Waller panned such an idea on Thursday.

“I’ve read some speculation recently that financial stability concerns could possibly lead the F.O.M.C. to slow rate increases or halt them earlier than expected,” he said. “Let me be clear that this is not something I’m considering or believe to be a very likely development.”