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Fed Chair Jerome Powell says smaller rate hikes could come in December


Fed Chairman Jerome Powell on inflation

WASHINGTON – Federal Reserve Chairman Jerome Powell confirmed on Wednesday that smaller rate hikes are likely even as he sees progress in the fight against inflation largely unsatisfactory. .

Recalling recent statements from other central bank officials and comments at the Fed’s November meeting, Powell said he sees the central bank as likely to scale back rate hikes as soon as next month.

However, he warned that monetary policy is likely to be constrained for a while until real signs of progress on inflation emerge.

“Despite some promising developments, we have a long way to go to restore price stability,” Mr. Powell said in a speech at the Brookings Institution.

The chairman noted that policy moves like raising interest rates and reducing the Fed’s bond holdings often take time to go through the system.

“So it makes sense to adjust the pace of our rate hikes as we get close to a level of containment that would be sufficient to bring down inflation,” he added. “Time to moderate the pace of rate hikes could come as soon as the December meeting.”

Powell: There's a long way to go to restore price stability

According to CME Group data, markets have priced in about a 65% chance the Fed will cut interest rates by half a percentage point in December, after four consecutive 0.75 point changes. That rate of increase was the strongest since the early 1980s.

What remains to be seen is where the Fed goes from there. With markets pricing in the possibility of a rate cut by the end of 2023, Powell instead warned that restrictive policy will remain in place until inflation shows signs of easing more consistently.

“Given our progress in tightening policy, the timing of that adjustment is much less important than the question of how much further we will need to raise rates to keep inflation under control and the length of time it will take.” to keep policy limited,” Powell said.

He added: “There is a possibility that restoring price stability will require keeping policy in moderation for a while. History strongly warns of premature policy easing.” “We will stay on the course until the work is done.”

Powell’s comments come with some pause in signs that inflation is falling and the extremely tight labor market is easing.

Earlier this month, the consumer price index showed inflation rising but less than economists had estimated. Separate reports on Wednesday showed private wage growth was much lower than expected in November while job openings also fell.

Jerome Powell on Wages, Unemployment and Inflation

However, Powell said short-term data can be deceptive and he needs to see more consistent evidence.

For example, he said Fed economists expect that the central bank’s preferred core personal consumption expenditure price index for October, due out on Thursday, will show inflation. development runs at a rate of 5% annually. That would be down from 5.1% in September but still well above the Fed’s long-term 2% target.

“More evidence will be needed to be sure that inflation is actually falling,” Mr. Powell said. “By any standard, inflation is still too high.”

“I am simply saying we have more grounds to deal with,” he added.

Powell added that he expects the ultimate peak interest rate – the “final rate” – to be “a little bit higher than thought” when the Federal Open Market Committee members set the rate. their last prediction was in September. Committee members at the time said they expected the final rate to hit 4.6%; markets now see it in the 5%-5.25% range, according to CME Group data.

The core supply chain problems of the inflation outbreak have eased, while growth has generally slowed below trend, even with a 2.9% annual increase in GDP, Mr. Powell said. third quarter. He predicts housing inflation will pick up next year but will likely fall after that.

However, he said the labor market only showed “temporary signs of rebalancing” after job openings exceeded available workers by a ratio of 2:1. That gap has closed to 1.7 to 1 but is still much higher by historical standards.

The tight labor market has led to a sharp increase in workers’ wages but has not kept pace with inflation.

“Obviously, strong wage growth is a good thing,” he said. But for wage growth to be sustainable, it needs to match 2% inflation.

Powell spoke at length about the factors that keep the labor force participation rate low, a key factor in addressing the imbalance between open employment and available workers. He said a key issue was “over-retirement” during the Covid pandemic.

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