© Reuters. FILE PHOTO: Federal Reserve Chairman Jerome Powell holds a news conference in Washington, U.S., November 2, 2022. REUTERS/Elizabeth Frantz/File Photo
By Howard Schneider and Ann Saphir
WASHINGTON (Reuters) – The U.S. central bank could slow the pace of interest rate hikes “as soon as December,” Federal Reserve Chairman Jerome Powell said on Wednesday, warning that the fight against inflation development is far from over and there are still important unanswered questions, including how much will eventually need to be increased and for how long.
“It makes sense for us to adjust the rate of rate hike as we get close to enough restraint to reduce inflation. The time to adjust the rate of rate hike could come as soon as the December meeting.” Mr. Powell said in a speech to the Brookings Institution think tank in Washington.
However, in remarks highlighting the work that remains to be done in controlling inflation, Powell said that issue is “much less important than questions about how much longer we will need to raise rates.” to control inflation and how long it takes.” to keep policy in check.”
Although the Fed chief did not disclose his estimated “final interest rate”, Mr. Powell said it could be “slightly higher” than the 4.6% rate suggested by policymakers. in their September prediction. He said containing inflation “will require keeping policy at a restrained level for a while”, a comment that seems counter to market expectations that the US central bank could begin cut interest rates next year as the economy slows.
“We will stay on track until the job is done,” Mr. Powell said, noting that while some data suggests inflation will slow next year, “we have a long way to go. long way to restore price stability… Despite tighter policy and slower growth over the past year, we haven’t seen clear progress in slowing inflation.”
The Fed’s response to the fastest U.S. inflation spike in 40 years was a similarly abrupt rate hike. With a half percentage point increase expected at its December 13-14 meeting, the central bank will lift the overnight policy rate from near zero in March to 4.25%-4.50 %, the fastest rate change since before. Fed President Paul Volcker is grappling with an even worse price rise.
That has made home mortgages and other forms of credit more expensive for consumers and businesses.
However, it did not cause any significant impact on the US job market, where the current 3.7% unemployment rate has led some policymakers to argue that they can the freedom to tighten interest rates further without much risk.
But it hasn’t had a convincing effect on inflation either, a fact that remains to be seen as how much more the Fed may need to raise rates into what it calls “restricted” territory designed to do so. slow economy.
Powell said the Fed’s estimates for October inflation suggest its preferred measure remains to about three times the central bank’s 2% target.
‘WAY THE LONG WAY’
Powell’s remarks triggered a strong rally in capital and bond markets, which have surged this year on the back of aggressive Fed rate hikes.
The benchmark plunged into positive territory and ended up up about 1.5% on the day and bond yields, which move in the opposite direction of their prices, both fell. Yields on the 2-year Treasury note, the term most sensitive to Fed rate expectations, fell to around 4.47% from 4.52%. The dollar weakened against a basket of major trading partners’ currencies.
In interest rate futures markets, traders have added to popular bets that the Fed will slow the pace of rate hikes at its meeting in two weeks.
“You can’t keep raising rates as fast as they’re doing,” said Rick Meckler at Cherry Lane Investments in New Vernon, New Jersey. “That said, investors have always enjoyed the comfort of hearing it directly from the chairman (Fed).”
Mr. Powell noted that while commodity inflation is easing, housing costs are likely to continue to rise next year, while key price measures for services remain high and the labor market tightens. chop.
“Growth in economic activity has slowed, far below its long-term trend,” Powell said. But for inflation to slow, “this needs to be sustained. The bottlenecks in commodity production are easing and commodity price inflation also appears to be easing, and this must continue as well.” ” But “we’re likely to see housing service inflation start to decline towards the end of next year,” he said. Citing data released earlier on Wednesday that showed there are still about 1.7 job openings per unemployed, he said that “so far, we have only seen tentative signs of labor needs.”
“Despite some promising developments, we have a long way to go to restore price stability.”