Fed Chair Jerome Powell says smaller rate hikes could come in December

The FOMC is the Federal Open Market Committee, tasked with charting the course for the Federal Reserve’s monetary policy. Between now and March 21-22, the Fed will get a couple more important data points on the health of the U.S. economy. The Labor Department releases its February jobs report on March 10 and its February CPI inflation reading on March 14. That brings me to a concluding word on the path ahead for monetary policy. The Committee remains steadfast in our oft-expressed commitment to support the economy for as long as is needed to achieve a full recovery. The changes we made last year to our Statement on Longer-Run Goals and Monetary Policy Strategy are well suited to address today’s challenges.

“Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” he added. “The time for moderating the pace of rate increases may come as soon as the December meeting.” Central banks have always faced the problem of distinguishing transitory inflation spikes from more troublesome developments, and it is sometimes difficult to do so with confidence in real time. At such times, there is no substitute for a careful focus on incoming data and evolving risks.

The Fed

Powell said he expects the buying to continue until the Fed makes progress on its goals. Missive from federal health officials comes in response to a letter in which the Florida surgeon general voiced concerns about what he described as adverse effects from mRNA vaccines. Sign Up NowGet this delivered to your inbox, and more info about our products and services. Democratic legislators in particular have been worried that the Powell Fed risks dragging down the economy, and in particular those at the lower end of the wealth scale, with its determination to fight inflation. Democratic legislators in particular have been worried that the Powell Fed risks dragging down the economy with its determination to fight inflation.

• “Jay Powell is a punching bag in Washington at this point. He’s going to take the blame for establishing price stability. If he does that well, in the years to come he’ll be venerated. People will speak very highly of him.”
• For their part, congressional Republicans will likely highlight concerns that the Fed must do even more to cool inflation.
• “This is what he is supposed to do,” Joseph Brusuelas, chief economist at advisory firm RSM, said of Powell’s evolving policy stances.
• “It took Jay Powell, over the course of a very brief prepared statement and a Q&A, to get those expectations cemented into a higher place.”

The Fed is also expected to continue to allow up to $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities to mature and roll off its balance sheet per month. John Lynch, chief investment officer at Comerica Wealth Management, says January’s inflation hiccup is bad news for Powell’s inflation fight. However, Powell said short-term data can be deceptive and he needs to see more consistent evidence. Markets took a more dovish tone from Powell’s speech, with the top rate put at just shy of 5% by May 2023 and bets that the Fed will cut half a point by the end of the year. “Headline versus Core Inflation in the Conduct of Monetary Policy,” speech delivered at the Business Cycles, International Transmission and Macroeconomic Policies Conference, HEC Montreal, Montreal, October 20.

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“He’s adjusting to data coming in, which the entire board should be doing,” Hogan said. “If the facts change again through the February and March data, he’ll likely become flexible on that side and not https://day-trading.info/ push this too far to the point where they need to break something.” Federal Reserve Chairman Jerome Powell’s prepared speech this week to Congress took just a few minutes, but it changed everything.

The spike in inflation is so far largely the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy. Durable goods alone contributed about 1 percentage point to the latest 12‑month measures of headline and core inflation. Energy prices, which rebounded with the strong recovery, added another 0.8 percentage point to headline inflation, and from long experience we expect the inflation effects of these increases to be transitory. In addition, some prices—for example, for hotel rooms and airplane tickets—declined sharply during the recession and have now moved back up close to pre-pandemic levels. The 12-month window we use in computing inflation now captures the rebound in prices but not the initial decline, temporarily elevating reported inflation.

Finance

Supply chain snarls are easing, which means fewer shortages of goods and parts. Wage growth is plateauing, which, if followed by declines, would reduce inflationary pressures. At its meeting last month, the Fed slowed the pace of its interest rate hikes to a quarter-percentage point after six larger increases since the summer of 2022.

In recent days, some officials, such as Atlanta Fed President Raphael Bostic, have indicated that they see the rate hikes coming to a close soon. However, others, including Governor Christopher Waller, have expressed concern about the recent inflation data and say tight policy is likely to stay in place. Citing data earlier this year showing that inflation has reversed the deceleration it showed in late 2022, the central bank leader warned of tighter monetary policy ahead to slow a growing economy. In December, the central bank raised rates by 0.50%; in each of the prior four meetings, the Fed had raised rates by 0.75%. In a press conference following that decision, Powell emphasized signs of “disinflation” are starting to emerge in the economy. Likewise, the Bank of England is expected to raise rates Thursday to try to ease consumer prices, which have risen at their fastest pace in 40 years, to 10.1 percent in September.

“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” the Fed chief said in prepared remarks to the Senate Banking Committee. The tone of the February data is likely to play a pivotal role in whether the Fed pencils in one more rate hike to a range of 5.25%-5.5% or two to 5.5%-5.75%. The central bank will want to see those reports to decide next steps, Rosner-Warbuton said. Now, he said, the Fed likely will have to take its funds rate to around 6% before inflation abates, and that will cause economic damage.

Sen. Robert Menendez, a member of the Banking Committee, has urged the Biden administration to fill the spot with a Hispanic. Menendez notes that there has never been a Hispanic member of the Fed’s rate-setting committee. Other issues will likely arise when Powell testifies Tuesday to the Senate Banking Committee and Wednesday to the House Financial Services Committee. One could be who will replace Lael Brainard, who has left her position as the Fed’s vice chair for a top policymaking post at the White House.

In just a few minutes this week, Powell changed everything on market’s view of interest rates

Stocks tumbled Tuesday then again on Thursday as investors grew more nervous about the Fed’s future path. Thursday’s sell-off, however, did trigger a shift lower in terms of expectations for a half-point hike this month, down to 58% most recently, according to a CME Group estimate. The appearance is part of the congressionally mandated semiannual report on monetary policy.

But that interpretation of the coming Federal Open Market Committee meeting is a mistake. The Fed may prove more determined on inflation than markets expect — which means the easy gains are already behind us for the year. The rapid reopening of the economy has top 20 net mvc developer jobs, now hiring brought a sharp run-up in inflation. But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary. This assessment is a critical and ongoing one, and we are carefully monitoring incoming data.

Fed Chairman won’t be able to be definitive about path of rates given key data comes after his testimony, economists say

Basically, it was the January inflation data plus signs that the labor market remains remarkably strong despite the Fed’s efforts to slow it down. That made Powell, who only weeks earlier had talked about “disinflationary” forces at play, switch gears and start talking tough again on monetary policy. Returning to monetary policy, my FOMC colleagues and I are strongly committed to restoring price stability. After our November meeting, we noted that we anticipated that ongoing rate increases will be appropriate in order to attain a policy stance that is sufficiently restrictive to move inflation down to 2 percent over time. Today I will offer a progress report on the Federal Open Market Committee’s efforts to restore price stability to the U.S. economy for the benefit of the American people. The report must begin by acknowledging the reality that inflation remains far too high.

“The on-the-day equity market surge is in part a relief rally,” wrote Krishna Guha, head of global policy and central bank strategy at Evercore ISI. “Many investors feared the Fed chair would take a max hawkish sledgehammer to the recent easing of financial conditions … That overhang has now gone. Echoing recent statements from other central bank officials and comments at the November Fed meeting, Powell said he sees the central bank in position to reduce the size of rate hikes as soon as next month. We carefully monitor a wide range of indicators of longer-term inflation expectations. These measures today are at levels broadly consistent with our 2 percent objective .

I will return to policy at the end of my comments, but for now, I will simply say that we have more ground to cover. The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test. We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis. The outlook for the labor market has brightened considerably in recent months. After faltering last winter, job gains have risen steadily over the course of this year and now average 832,000 over the past three months, of which almost 800,000 have been in services . The pace of total hiring is faster than at any time in the recorded data before the pandemic.

Housing services inflation measures the rise in the price of all rents and the rise in the rental-equivalent cost of owner-occupied housing. Unlike goods inflation, housing services inflation has continued to rise and now stands at 7.1 percent over the past 12 months. Measures of 12-month inflation in new leases rose to nearly 20 percent during the pandemic but have been falling sharply since about midyear . Early in the pandemic, goods prices began rising rapidly, as abnormally strong demand was met by pandemic-hampered supply. Reports from businesses and many indicators suggest that supply chain issues are now easing.

Markets watching Powell speech for clues about policy

The 30-year bond, for instance, is up more than half a percentage point and the benchmark 10-year yield has risen 44 basis points. Monetary policy is playing a role in the rise of some asset prices, Fed Chairman Jerome Powell acknowledged. Powell said fiscal stimulus is not likely to create persistent or large increases in prices. “We’ve been living in a world for a quarter of a century where the pressures were disinflationary,” he said. “Inflation dynamics do change over time, but they don’t turn on a dime.” He told the Senate Banking Committee that there will be temporary base effects in spring inflation data this year, after the very low readings of last March and April.

This same dynamic of upward inflation pressure dissipating and, in some cases, reversing seems likely to play out in durables more generally. Over the 25 years preceding the pandemic, durables prices actually declined, with inflation averaging negative 1.9 percent per year .9 As supply problems have begun to resolve, inflation in durable goods other than autos has now slowed and may be starting to fall. It seems unlikely that durables inflation will continue to contribute importantly over time to overall inflation. We will be looking for evidence that supports or undercuts that expectation. We consult a range of measures meant to capture whether price increases for particular items are spilling over into broad-based inflation. These include trimmed mean measures and measures excluding durables and computed from just before the pandemic.

However, core inflation, excluding food and energy, is projected to increase to 5.7% from 5.5%. However, Guha said that Powell is unlikely to tee up a rate hike of a half-point, or 50 basis points, later this month, which some investors fear. Market pricing on Monday pointed to about a 31% probability for the larger move, according to CME Group data.

Bond market pros had been waiting for Powell’s view on why rates were rising and whether he was concerned by it. The stimulus program is expected to get through Congress largely intact but with little or no Republican support. A key objection to the plan is the impact it would have on a federal budget deficit, which is already projected to be $2.3 trillion this year not counting the administration’s proposal. And if the inflation data doesn’t cool, we’ll soon be talking about 6%, Gregory noted. “Yes, the economy is strong. But that doesn’t mean you’re going to glide by with no recession at all,” he said. “The Fed will have several key metrics in hand before their next meeting, including another look at retail sales and inflation,” Roach says.

We had that jobs report last week– 517,000 payrolls, keeping the upside risk to inflation high. Asked about the time it might take for inflation to return to the Fed’s 2% target, Powell suggested this process would likely take into next year. As for the Fed’s current 2% target — which some commentators, including Rubenstein, have suggested could need to be changed in favor of a higher target — Powell said this remains a firm target.