Federal Reserve Chair Talks Tough on Inflation
Jerome Powell, the Federal Reserve Chairman, pushed back on market expectations for aggressive interest rate cuts by insisting it was too early to declare victory over inflation. He made these remarks in the wake of several recently positive indicators on prices. Powell addressed the audience at Spelman College in Atlanta and stated that the Federal Open Market Committee plans on “keeping policy restrictive” until policymakers are convinced that inflation is solidly heading back to 2%. He also mentioned that the Fed is willing to tighten policy even further if necessary. It was interesting to note that markets initially showed minimal reactions to Powell’s comments, with major averages mixed on Wall Street, and Treasury yields lower.
Powell’s Comments on Wall Street
The Fed chief’s comments have proven that the expectation that the Fed is done raising rates and will move to an easing posture in 2024, helping underpin a strong Wall Street rally that has sent the Dow Jones Industrial Average up by more than 8% over the past month to a new 2023 high. In fact, Powell’s statements reinforced this belief, as they provided the clearest indication yet that the Fed is likely done with its aggressive rate hike cycle and may be poised to soon move to an easing posture. Powell acknowledged the risks of under- and over-tightening, leading the FOMC to move forward carefully in light of the fact that uncertainty about the economic outlook is unusually high.
Inflation and the Economy
Powell also touched on the fact that the pandemic’s demand- and supply-related effects adding to the economic outlook’s elevated uncertainty. He also highlighted the fact that the strong rise in prices is likely to slow over the coming year. Despite the personal consumption expenditures prices being up 3% from a year ago, Powell believes that the Fed’s preferred inflation gauge is still “well above” the central bank’s goal. In addition, the recent sharp declines in energy have been responsible for much of the easing in inflation, which is why Powell urged that this progress should continue in order for the Fed to reach its 2 percent objective.
Expectations for Cuts Remain
Market pricing indicated that the Fed is done hiking, and cuts could start as soon as March 2024. Furthermore, futures are pointing to cuts totaling 1.25 percentage points by the end of the year. However, Powell and his fellow officials have provided no indication that they’re thinking about cuts, indicating that future decisions will be based on the totality of incoming data and their implications for the economic outlook. Nevertheless, Powell did concede that the labor market remains “very strong,” despite a reduced pace of job creation. The Fed’s next meeting is scheduled for December 12-13.
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