Fed Chair Jerome Powell says smaller fee hikes might are available December

WASHINGTON – Federal Reserve Chair Jerome Powell confirmed on Wednesday that smaller rate hikes are likely, although he sees progress in the fight against inflation as largely insufficient.

Echoing recent comments from other central bank officials and comments at the November Fed meeting, Powell said he sees the central bank poised to scale back the scope of rate hikes as early as next month.

However, he warned that monetary policy is likely to remain tight for some time until there are any real signs of progress on inflation.

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

The chairman pointed out that policy actions such as rate hikes and Fed reductions in bond holdings generally take time to penetrate the system.

“Therefore, it makes sense to slow the pace of our rate hikes as we approach the level of dovishness sufficient to bring down inflation,” he added. “The time to slow the pace of rate hikes could come as early as the December meeting.”

According to data from CME Group, markets had already priced in a roughly 65% ​​chance that the Fed would cut rate hikes by half a percentage point in December, after four consecutive 0.75 point hikes. This rate hike rate is the most aggressive since the early 1980s.

It remains to be seen where the Fed will go from there. As markets price in the likelihood of rate cuts later in 2023, Powell instead warned that tightening policies will remain in place until inflation shows more consistent signs of slowing down.

“Given our progress in tightening monetary policy, the timing of this moderation is far less important than how much more rate hikes will be needed to control inflation and how long it will be necessary to keep monetary policy at accommodative levels ‘ Powell said.

“It is likely that restoring price stability will require policies to be kept at restrictive levels for some time. History strongly warns against premature policy easing,” he added. “We will hold the course until the job is done.”

Powell’s comments contain some tentative signs that inflation is easing and the ultra-strained labor market is easing.

Earlier this month, the consumer price index pointed to a rise in inflation, but less than economists had estimated. Separate reports on Wednesday showed that November personal wage growth was far weaker than expected, while job vacancies also fell.

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

He said, for example, that Fed economists expect the central bank’s preferred October personal spending index, to be released on Thursday, to show annual inflation of 5%. That would be down from 5.1% in September, but still well above the Fed’s long-term target of 2%.

“It’s going to take a lot more evidence to reassure that inflation is actually declining,” Powell said. “By any measure, inflation remains far too high.”

“I’ll just say we have more work to do,” he added.

Powell added that he expects interest rates’ final peak — the “final rate” — “to be a little higher than anticipated” when members of the rate-setting FOMC made their latest forecast in September. Committee members said at the time they expected the final rate to reach 4.6%; Markets now see it in the 5% to 5.25% range, according to CME Group data.

Supply chain issues at the heart of the inflationary spurt have eased, Powell said, while growth broadly slowed below trend, even with third-quarter GDP expanding at an annualized rate of 2.9%. He expects housing inflation to rise into next year, but then likely fall.

However, he said the job market had shown “only tentative signs of rebalancing” after the number of vacancies exceeded the available workforce by 2 to 1. This gap has closed to 1.7 to 1 but remains well above historical norms.

The tight labor market has led to a sharp increase in workers’ wages, which have still not been able to keep up with inflation.

“To be clear, strong wage growth is a good thing. But for wage growth to be sustainable, it has to be consistent with 2% inflation,” he said.

Powell spoke at length about the factors that keep labor force participation low, a key factor in addressing the mismatch between vacancies and the available workforce. He said a major issue has been “excessive retirements” during the Covid pandemic.