Jerome Powell, the chairman of the Federal Reserve, stated on Wednesday that it was time to slow the rate of upcoming interest rate increases while also indicating a lengthy economic adjustment to a scenario in which borrowing costs will remain high, inflation will decline slowly, and the United States will continue to experience a persistent labor shortage.
The Fed was "slowing down" from the rapid pace of three-quarter percentage point rate hikes that had prevailed since June, and would feel its way towards the peak interest rate needed to slow inflation to the Fed's 2% target, Powell said in an hour-long session of prepared remarks and questions at the Brookings Institution think tank, his final scheduled appearance before the central bank's next meeting in two weeks.
However, he also described potential longer-term changes that may be occurring, particularly in the labor supply, which might indicate a protracted era of high interest rates and inflation that only gradually responds to the Fed's repressive policy. He also dismissed the notion that the central bank's policymakers would "crash" the economy in an effort to control the highest inflation in 40 years, arguing that a "soft or softish" landing was still feasible with inflation dropping without a sharp increase in unemployment.
"Powell stated that officials "wouldn't aim to destroy the economy and then clean it up afterward, since we think that reducing rates is not something we want to do anytime soon. Due to this, we are going to strive to find the appropriate level by slowing down "that over time reduces inflation.
When taken as a whole, the remarks demonstrated how the Fed was addressing several longer-term factors that the pandemic had exacerbated, including the demographic impact that an aging population, COVID-era retirements, and sluggish immigration was having on the labor market.
These won't change anytime soon, according to Powell, who acknowledged that the only way to balance a tight labor market will be for the Fed to take measures that reduce the demand for employees, either by reducing the number of open positions or, as some worry, by increasing unemployment.
Powell added, "I think for now we have to presume" that the labor supply won't increase. "We must take the necessary steps to bring the labor market back into balance in order to get to 2% inflation...really merely by limiting employment growth rather than laying off people."
Since the beginning of the pandemic, those kinds of structural worries have been simmering under Fed discussion, but they are now coming to the fore.
For instance, worries regarding international supply chains were initially viewed as passing issues that would assist lower high inflation as they occurred.
The U.S. labor force participation rate is still low, and improvement has been slower than anticipated. In particular, China is currently experiencing repeated lockdowns that have made it a less reliable source of goods.
The equity and bond markets, which have been battered this year as a result of the Fed's rapid rate hikes, rallied strongly in response to Powell's comments about a forthcoming slowdown in rate increases.
Bond rates, which fluctuate in the inverse relationship to their values, all fell as the benchmark S&P 500 index SPX surged into positive territory and closed 3.09% higher. The 2-year Treasury note's yield, which is most influenced by Fed rate projections, decreased from 4.52% to roughly 4.37%. In comparison to a basket of the currencies of the major trading partners, the dollar DXY fell.
The current bets that the Fed will decrease the rate of rate increases at its meeting in two weeks were increased by traders in the rate futures markets.
At Cherry Lane Investments in New Vernon, New Jersey, Rick Meckler stated, "You can't keep hiking rates as quickly as they were doing it. That being said, investors always find it comforting to hear it from the (Fed) chair personally.
Powell stated that it was still unclear "how much farther we will need to raise rates to contain inflation, and the length of time it would be required to retain policy at a restrictive level" despite the upcoming slowdown in the pace of rate rises.
Powell said the "terminal rate" is expected to be "slightly higher" than the 4.6% suggested by policymakers in their September predictions, despite the Fed chief not disclosing his own estimate. In a statement that went against market expectations that the U.S. central bank would start lowering rates next year as the economy slowed, he warned that combating inflation "would necessitate retaining policy at a tight level for some time."
On Dec. 13–14, the central bank will convene once more. Policymakers will also release fresh predictions for rates, economic growth, inflation, and unemployment in the upcoming years in addition to approving the anticipated half-point rate increase.
With the impending half-point increase, the central bank's overnight policy rate will have increased from nearly zero in March to 4.25%–4.50%, marking the fastest shift in rates since previous Fed Chair Paul Volcker was fending off an even more dramatic surge in prices.
However, it hasn't yet had a strong effect on inflation. According to Powell, Fed projections for October showed that the preferred gauge was still rising at a rate that was over triple the central bank's 2% target.
He pointed out that while the cost of housing has been rising, the inflation rate for goods has been slowing, while the key price measures for services are still high and the labor market remains tight. According to data provided earlier on Wednesday, there are still roughly 1.7 opportunities for jobs for every unemployed person.
Powell stated, "Despite these encouraging signs, we still have a long way to go in restoring price stability. "We'll keep going till the project is finished,"