Federal Reserve officials are considering pausing interest hikes following their March meeting if more evidence of cooling inflation rolls in.
This is based on a timeline sketched out by one of the Fed's most closely watched hawks, Governor Christopher Waller, who was an early advocate of the Fed's rate hike strategy last year.
Policymakers are expected to hike rates by a quarter of a percentage point at the end of Wednesday's two-day meeting, to a range of 4.5% to 4.75%, slowing from December's 50 basis point hike after four consecutive 75 bps moves.
Fed officials projected in December that they would pause when rates rise above 5%, but Wall Street traders are betting that they will stop slightly below that level.
U.S. central bankers said inflation data for October, November and December, which all showed a steady decline in price growth, was welcome news, but they still needed to see more.
Waller, in recent comments, explained how much more evidence he needed to call a halt.
"The argument is just whether you should pause after three months of data or pause after six months of data," Waller said on Jan. 20. "From the risk management side - I need six months of data, not just three."
The Core Personal Consumption Expenditures Index rose 2.2% in the three months through December on an annualized basis and 3.7% in the last six months, down from its 4.4% pace in the last 12 months, Friday's report showed.
Vice Chair Lael Brainard, speaking the day before Waller, also pointed to declines in three- and six-month measures of inflation.
If those trends continue for another three months, according to Waller's benchmark, policymakers could have seen enough to be confident of pausing before the May 2-3 meeting when they will have data for January, February and March in hand.
"The messaging shifts - before it was you've got to get moving quickly and hunker down because we're going to be jacking rates," said Brett Ryan, senior U.S. economist at Deutsche Bank. "Now it's not about the pace, it's about the end point and we have to feel our way around where the end point is."
A report released Tuesday showed that the U.S. Employment Cost Index, a total measure of wages and benefits, climbed 1% in the fourth quarter, at a slower pace than economists had predicted. That proves that demand declined in the last three months of 2022. ECI data for the first quarter will be released April 28.
Remembering how they got head-faked in 2021 when prices cooled and then heated back up, officials have stressed the need to see a few more months of similar soft readings to convince them that gauges are down significantly to their 2% target.
Waller pointed to encouraging trends in wage numbers, which have shown a deceleration over the past few months. But he noted that some monthly measures of inflation are largely unchanged from what they were in early 2022.
He was among the officials who explicitly said they agreed with slowing to 25 basis points this week while continuing to tighten.
