- Federal Reserve Chairman Jerome Powell on Friday pushed back on market expectations for impending aggressive interest rate cuts.
- “It would be premature to conclude with confidence that we have reached a sufficiently hawkish stance or to speculate about when policies might be eased,” Powell said in a speech.
- However, the comments gave some credence to the idea that the Fed is at least done raising rates, as the series of rate hikes since March 2022 have hurt economic activity. Powell noted that inflation is “moving in the right direction.”
- Markets largely viewed Powell’s comments as cautious as stock prices rose and Treasury yields fell sharply.
Federal Reserve Board Chairman Jerome Powell speaks during a press conference following a meeting of the Federal Open Market Committee on September 20, 2023 at the Federal Reserve in Washington, DC.
Chip Somodevilla | Getty Images
Federal Reserve Chairman Jerome Powell on Friday pushed back on market expectations for impending aggressive interest rate cuts, saying it was too early to declare victory over inflation.
Despite a number of positive indicators regarding prices recently, the central bank chief said the Federal Open Market Committee plans to “maintain restrictive policy” until policymakers are convinced that inflation is clearly heading back toward 2%.
“It would be premature to conclude with confidence that we have reached a sufficiently restrictive stance or to speculate about when the policy might be relaxed,” Powell said in prepared remarks to an audience at Spelman College in Atlanta. “We are prepared to further tighten the policy if it seems appropriate.”
However, he also pointed out that policy is “clearly in the restrictive zone” and noted that the risk balance between too much or too little action to combat inflation is currently almost balanced.
Following Powell’s comments, markets rose, with major Wall Street averages turning positive and Treasury yields falling sharply.
“Markets view today’s comments as a move toward the dovish camp,” said Jeffrey Roach, chief economist at LPL Financial.
Expectations that the Fed is done raising interest rates and will move to easing policy in 2024 have contributed to a strong rally on Wall Street, sending the Dow Jones Industrial Average up more than 8% to a new high last month increased in 2023.
Powell’s comments gave some credence to the notion that the Fed is at least done raising rates, as the series of rate hikes since March 2022 have hurt economic activity.
“Having come this far so quickly, the FOMC is proceeding cautiously as the risks of under- and over-tightening become more balanced,” he said.
“As the demand and supply impacts of the pandemic continue to fade, uncertainty about the outlook for the economy is unusually high,” he added. “Like most forecasters, my colleagues and I expect spending and output growth to slow next year as the effects of the pandemic and reopening fade and tight monetary policy weighs on aggregate demand.”
A report from the Commerce Department on Thursday showed that prices for personal consumption expenditures, the Fed’s preferred indicator of inflation, rose 3% from a year earlier, but rose 3.5% on a core basis that excludes volatile food and energy prices. The recent sharp decline in the energy sector was largely responsible for the decline in inflation.
Powell said current levels were still “well above” the central bank’s target. Noting that core inflation has been running at 2.5% annually over the past six months, Powell said: “While the lower inflation readings of recent months are welcome, progress must continue if we are to achieve our 2% target want to reach.”
“Inflation is still well above target, but it is moving in the right direction,” he said. “That’s why we think the right thing to do now is to proceed cautiously and think carefully about how things play out so that we can let the data tell us what the story is. The data will tell us whether we have done enough or whether we need to do more.”
After inflation reached its highest level since the early 1980s, the Fed issued a series of 11 interest rate hikes, bringing its key interest rate to its highest level in 22 years, with a target range of between 5.25% and 5.5%. The FOMC held interest rates at the same level at its last two meetings, and several officials have indicated that they believe the federal funds rate is probably at or near where it needs to be.
The Fed’s next meeting will take place on December 12th and 13th.
“The strong actions we have taken have moved our key interest rate significantly into restrictive territory, meaning tight monetary policy is putting downward pressure on economic activity and inflation,” Powell said. “Monetary policy is expected to have a lagging effect on economic conditions, and the full impact of our tightening is unlikely to be felt yet.”
Market prices on Friday morning suggested that the Fed is indeed finished raising rates and could begin cutting rates as early as March 2024, according to CME Group. Additionally, futures point to cuts totaling 1.25 percentage points by year-end, a reduction of five quarter percentage points.
However, neither Powell nor any of his counterparts have given any indication that they are considering cuts, with the chairman sticking to data dependence rather than a predetermined course in future decisions.
“We make decisions session by session based on the totality of incoming data and their implications for the outlook for economic activity and inflation and the balance of risks,” Powell said.
Turning to economic data, Powell called the labor market “very strong” and said a slower pace of job creation was helping to rebalance supply and demand.