Powell says Fed could slow rate hikes at next meeting

Jerome H. Powell, the chairman of the Federal Reserve, signaled on Wednesday that the central bank may slow its rapid pace of raising interest rates at its December meeting while noting that borrowing costs need to rise further. as policymakers remain concerned about a sustained surge in inflation. .

Investors cheered his comments, with stocks rising on the mere hint that the Fed’s oversized rate hikes could soon taper off, although Mr Powell stressed that he and his colleagues were focused on raising rates high enough to rein in the tide. inflation, rather than how quickly they got there.

The S&P 500 climbed more than 3%, the index’s best day in more than two weeks. The Nasdaq composite index, which is particularly sensitive to changing views on interest rates, rose 4.4%.

The Fed raised interest rates from near zero as recently as March to a range of 3.75-4% at its meeting this month. Its last four rate moves have come in three-quarter-point increments — huge adjustments, the likes of which the Fed hasn’t made since 1994. Central bankers have made it clear they think it would be wise to slow the pace soon, and Mr. Powell locked in market expectations for a half-point move at the December 13-14 central bank meeting.

“The time to moderate the pace of rate hikes could come as early as the December meeting,” Powell said during a speech at the Brookings Institution in Washington.

Moving less quickly would allow the Fed to continue its fastest inflation battle in decades while giving policymakers more time to see how the substantial rate moves they had already made were playing out. While interest rate changes act quickly to slow the housing market, the full effect can take months or years to be felt in the economy.

If Fed officials raise rates too much and realize their mistake belatedly, they could cost Americans jobs and plunge the economy into a sharp recession deeper than is needed to control inflation. This is something officials want to avoid.

“My colleagues and I don’t want to overtighten,” Mr. Powell said, referring to rate increases that tighten the flow of money too much. “Rate cutting is not something we want to do anytime soon. That’s why we’re slowing down and trying to find our way to what that good level is.

Still, Mr. Powell and his colleagues are trying to strike a balance. Even as they set the stage for an impending downturn, they want to make it clear that they are not giving up on their campaign against rapid price increases.

If investors believe the Fed is backtracking on its plans and asset prices rise in relief, money could become cheaper and easier to borrow, undoing some of the monetary restriction the central bank has instituted – and making inflation even more difficult to defeat. Wednesday’s market moves highlighted this challenge.

As they try to demonstrate their continued commitment to controlling inflation, officials have also tried to focus on how much rates still need to climb and how long borrowing costs are kept high enough to put the brakes on. the economy.

“Restoring price stability is likely to require keeping policy tight for some time,” Powell said.

Although the Fed Chairman acknowledged that inflation has shown encouraging signs of slowing recently, he cautioned against reading too much in a month of data. He pointed out that wage growth remained too fast to allow price increases to return to the Fed’s 2% annual target. Given this, he has repeatedly stressed that central bankers should continue to raise interest rates – probably more than they expected last September – to ensure they bring back rate hikes. normal price.

“We will stay the course until the job is done,” he said.

Mr. Powell was not the only one to send this message. Colleagues across the Fed system stressed they had more to do to cool the economy and help inflation come down.

“Consumer spending has remained resilient” and is “supported by growing labor incomes and still-high savings,” Fed Governor Lisa D. Cook said during a speech in Michigan on Wednesday. “How far we go and how long we keep rates tight will depend on progress in reducing inflation.”

The road to slowing inflation could be long. Mr. Powell pushed back against any notion that a recent moderation in price increases is a sure sign that price increases will soon return to more acceptable levels.

“Months of declines in data have often been followed by further increases,” he said. And while many economists expect inflation to moderate next year, “forecasts have predicted such a decline for more than a year, while inflation has moved stubbornly sideways.”

Mr Powell also pointed out that even if property prices are weighing on inflation and rent growth moderates next year as economists expect, the labor market remains very tight – and signs of a slowdown until at present are inconclusive.

This could help keep inflation high. When employers pay more in wages, they are likely to try to pass on these rising labor costs to their customers by raising prices. The Employment Cost Index, a quarterly measure of wages and benefits, increases by 5% on an annual basis. That’s much faster than the roughly 2.2% that was normal in the years before the pandemic.

“We want wages to rise sharply, but they need to rise to a level consistent with 2% inflation over time,” Powell said. “You’re 1.5% or 2% above that with the current salary increases.”

The Fed will receive further information on the labor market and inflation before its next monetary policy meeting. A new inflation report that the central bank is watching closely is due out on Thursday, and November’s jobs report will be released on Friday.

How the economy develops in the coming months will likely indicate how far rates need to rise next year – and whether the Fed can pull off what officials often call a “soft landing,” in which the labor returns to equilibrium and inflation slows without a major spike in the unemployment rate.

Mr Powell said he still sees a path to a soft landing, although it could be narrow if the Fed were to leave interest rates high for a longer period to fight inflation.

As price increases show encouraging signs of receding, some commentators have warned that the Fed risks overdoing it, threatening the health of the labor market and possibly global upheaval. On Wednesday, Mr. Powell pushed back against those criticisms.

“We don’t think the world will get any better if we take our time and inflation takes hold,” Powell said, noting that a later but more aggressive response could hurt even more. “The world will be better off if we can get this over with quickly.”