Federal Reserve Chairman Jerome Powell speaks during a press conference after the Federal Open Market Committee on September 20, 2023 at the Federal Reserve Board in Washington, DC.
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Federal Reserve Chairman Jerome Powell on Friday said it was too early to declare victory over inflation, dampening market expectations for more aggressive interest rate cuts.
Despite a recent set of positive indicators on prices, the central bank governor said the Federal Open Market Committee will not continue until policymakers are confident that inflation is firmly back to 2%. “We intend to keep our policies restrained,” he said.
“It is difficult to confidently conclude that we have achieved a sufficiently restrictive stance or to speculate on when policy will be eased,” Powell said in prepared remarks to an audience at Spelman College in Atlanta. It’s too early.” He said: “We are prepared to further strengthen the policy if deemed appropriate.”
But he also noted that policy is “into quite restrictive territory” and that the balance of risks between doing too much and too little inflation protection is now roughly balanced.
Markets rose in response to Powell’s comments, with major stock averages on Wall Street turning positive and yields on U.S. Treasuries falling sharply.
“The market sees today’s comments as inching closer to the dovish camp,” said Jeffrey Roach, chief economist at LPL Financial.
Expectations that the Fed will finish raising interest rates and begin easing in 2024 supported strong gains on Wall Street, with the Dow Jones Industrial Average rising more than 8% in the past month to a new 2023 high. .
Powell’s comments lend some credence to the idea that the Fed is at least done raising interest rates, as a series of rate hikes since March 2022 have hurt economic activity.
“The FOMC is moving forward cautiously because we got here so quickly and the risks of under-tightening and over-tightening are becoming more balanced,” he said.
“Uncertainty about the economic outlook is unusually high as the supply-and-demand impacts of the pandemic continue to ease,” he added. “Like many forecasters, my colleagues and I expect spending and output growth to slow next year as the effects of the pandemic and economic reopening fade and restrictive monetary policy weighs on aggregate demand. .”
Personal consumption expenditure prices, the Fed’s preferred inflation measure, rose 3% year over year, but rose 3.5% on a core basis, which excludes volatile food and energy prices, according to a report released Thursday by the Commerce Department. . The recent sharp decline in energy prices has been a major cause of easing inflation.
Powell said current levels remain “well above” the central bank’s target. Chairman Powell noted that core inflation has been running at an annualized rate of 2.5% over the past six months, saying, “While we welcome the decline in inflation over the past few months, achieving the 2% target requires That progress must continue.”
“Inflation remains well above target, but it is moving in the right direction,” he said. “So I think the right thing for us to do now is to act cautiously, think carefully about what is going on, and let the data tell us the story. It will tell you whether you did it or not.” We need to do more. ”
After inflation reached its highest level since the early 1980s, the Federal Reserve implemented a series of 11 rate hikes, bringing interest rates to their highest level in 22 years with a target range of 5.25% to 5.5%. Ta. The FOMC has held interest rates steady for the past two meetings, and several officials have indicated they believe the federal funds rate is probably at or near the required level.
The Fed’s next meeting is December 12-13.
“The strong measures we have taken have moved policy rates into a fairly restrictive zone, meaning that tight monetary policy is putting downward pressure on economic activity and inflation,” Powell said. Ta. “Monetary policy is thought to affect economic conditions over time, so it is likely that the effects of tightening have not yet been fully felt.”
Traders expect rate cuts
Market prices on Friday morning indicated that the Fed is indeed done raising rates and could begin cutting them as early as March 2024. According to CME Group. Furthermore, futures markets are projecting a total reduction of 1.25 percentage points by the end of the year, which equates to a quarterly reduction of 5 percentage points.
But neither Mr. Powell nor his colleagues have given any indication that they are considering cuts, and the chairman remains committed to relying on data rather than predetermined policy for future decisions.
“We make decisions at each meeting based on the comprehensiveness of the data coming in, the outlook for economic activity and inflation, and the impact on the balance of risk,” Powell said.
Powell cited economic data and characterized the labor market as “very strong,” saying the slowing pace of job creation is helping to rebalance supply and demand.