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Jay Powell sought to push back on speculation that the Federal Reserve had won its battle against inflation, even as traders stepped up bets that the Federal Reserve could start cutting interest rates as early as March next year.
In a speech on Friday, the Fed chairman indicated that it was too early to rule out further rate hikes or to begin discussing rate cuts.
“It would be premature to conclude with confidence that we have reached a sufficiently restrictive stance, or to speculate about when monetary policy might be eased,” he said, just before the start of a quiet period ahead of the final policy meeting of the year .
Following Powell’s comments, policy-sensitive two-year Treasury yields fell 0.14 percentage points to a five-month low of 4.56 percent, suggesting investors largely ignored his warnings. Traders in federal funds futures markets now see a roughly two-thirds chance that the Fed will cut interest rates as early as March 2024, up from about 20 percent a week ago.
Stocks also rebounded, with the S&P 500 ending the day up 0.6 percent at 4,594.63, its highest close since March 2022.
“A few weeks ago Powell said the policy was restrictive, but (on Friday he added) he believes the policy is ‘well in the restrictive range.’ I think it’s fair for markets to embrace this subtlety,” said Jeffrey Roach, chief economist at LPL Financial.
Gold hit an all-time high, rising as much as 1.9 percent to hit a high of $2,075.09 per troy ounce, surpassing the previous intraday peak set in August 2020.
The metal tends to gain when the dollar weakens, which is the case for the currency as the next interest rate move in the US is expected to be lower.
In about two weeks, the Federal Open Market Committee is preparing to keep its key interest rate back at a 22-year high of 5.25 to 5.5 percent, a level it has held since July. The Fed launched a historic campaign to raise interest rates in March 2022 to curb rising inflation.
But even as the Fed continues to pause its rate-hiking campaign, officials are cautious due to high uncertainty about the U.S. inflation outlook and concerns about easing conditions in financial markets. They have failed to signal more clearly that interest rates have peaked and to discuss criteria for reducing borrowing costs.
In order for cuts to be considered, the Fed must produce multiple inflation reports confirming this trend.
Powell reiterated that message on Friday, warning at an event at Spelman College in Georgia that the Federal Reserve “stands ready to further tighten monetary policy if appropriate,” even as he made clear that monetary policy is “broadly restrictive.” is “territory” and that the full impact of the Fed’s previous actions has yet to materialize.
In a discussion at the event, he emphasized that the Fed will closely monitor economic data. “Let the data show the right path,” he said.
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“While the lower inflation readings of recent months are welcome, this progress must continue if we are to reach our 2 percent target,” he said.
Also on Friday, Austan Goolsbee, president of the Chicago Fed and a voting member of the FOMC this year, said there was “no evidence” so far that inflation would stall at 3 percent and instead predicted a decline back to the long-standing 2 percent -Goal of the Fed.
In October, the core consumer spending price index – the Fed’s preferred measure of inflation – recorded an annual pace of 3.5 percent.
Additional reporting by Kate Duguid in New York