Rate Downshift Likely This Month
“The time for moderating the pace of rate increases may come as soon as the December meeting,” Fed Chair Powell said yesterday.
Chair Jerome Powell signaled that the Federal Reserve will slow the pace of interest-rate increases this month, while stressing that borrowing costs will need to keep rising and remain restrictive for some time to beat inflation.
His comments, in a speech yesterday at the Brookings Institution in Washington, likely cement expectations for the Fed to raise interest rates by 50 basis points (bps) when they meet on December 13 and 14, following four straight 75 bps moves.
“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said in the text of his speech. “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation and the length of time it will be necessary to hold policy at a restrictive level.”
Policy-sensitive two-year Treasury yields fell on Powell’s remarks, erasing increases on the day, and the S&P 500 index reversed losses to trade higher. The dollar slipped in value against major rivals on foreign-exchange markets.
The Fed’s actions—the most aggressive since the 1980s—have lifted the target for their benchmark rate to the range of 3.75 percent to 4 percent, from nearly zero in March. Powell said rates are likely to reach a “somewhat higher” level than officials estimated in September, when the median projection was for 4.6 percent next year. Those projections will be updated at the December meeting.
Investors see the Fed pausing hikes in the second quarter of 2023, once rates reach about 5 percent, according to pricing in futures contracts. Although traders expect rate cuts later in the year, Powell said a reduction isn’t something the Fed wants to do soon.
Economists see a recession in the next 12 months as more likely than not, but according to Powell, a so-called ‘soft landing’ for the economy—or a “softish” landing—remains “very plausible” and “still achievable,” though he acknowledged the path to such an outcome has been narrowing.
Regarding rate hikes, “we think that slowing down at this point is a good way to balance the risks” to the economy from inflation and slower growth, Powell said.
The Fed’s Beige Book regional economic survey, also released Wednesday, said economic activity in recent weeks “was about flat or up slightly since the previous report, down from the modest average pace of growth in the prior” period for the review that ran through early October.
Powell said the central bank is forecasting 12-month inflation based on its preferred gauge, the personal consumption expenditures price index, of 6 percent through October, and a 5 percent core rate.
There hasn’t been enough strong evidence to make a convincing case that inflation will soon decelerate, Powell said: “It will take substantially more evidence to give comfort that inflation is actually declining. The truth is that the path ahead for inflation remains highly uncertain.” He added that, “despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation.”
Inflation Components
The Fed chair walked through the components of inflation in yesterday’s prepared speech. He noted that goods prices have decelerated but added that it is “far too early to declare goods inflation vanquished.” Powell said that inflation rates on new home-rental leases have been falling.
He then launched into a discussion of service costs, focusing on scarce supply in the labor market, with the gap in labor-force participation mostly explained by pandemic-era retirements in his view. “These excess retirements might now account for more than 2 million of the 3-1/2 million shortfall in the labor force,” he said. He said the labor market is showing only “tentative signs” of what he called “rebalancing,” while wages are “well above” levels consistent with 2 percent inflation over time.
Powell’s remarks come as the Fed prepares to enter its pre-meeting blackout period at the end of the week.
Despite higher borrowing costs, the U.S. economy continues to grow, amid sustained demand and steady hiring. That resilience points to the need for ongoing rate increases, as long as inflation remains stubbornly above the Fed’s 2 percent target, policymakers have said.
A monthly employment report due out tomorrow is likely to show a gain of 200,000 jobs during November—which would be the slowest in almost two years, according to economists surveyed by Bloomberg. In another sign of labor-market cooling, data out yesterday showed that U.S. job openings fell in October, while the quits rate—a measure of voluntary job leavers as a share of total employment—also declined.
Several other Fed officials have said they are willing to slow the pace of rate increases while suggesting that rates will peak at a higher level than previously expected, as Powell himself said on November 2 after the central bank’s last policy meeting.
—With assistance from Liz Capo McCormick & Matthew Boesler.
Copyright 2022 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.