Jerome Powell Says Federal Reserve’s Rate Hikes Could Slow As Soon As December

Topline

Stocks jumped Wednesday afternoon after Federal Reserve chair Jerome Powell indicated a reprieve from the Fed’s most aggressive interest rate hikes in four decades is on the horizon as soon as next month, as investors pounce on any signs of progress from Powell in his war on inflation.

Key Facts

“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said at the Brookings Institution think tank, referring to the Federal Open Market Committee’s next rate decision, expected December 14.

Stocks gained on Powell’s sliver of optimism, with the Dow Jones Industrial Average gaining 1.9%, or 650 points, on the day, while the S&P 500 and tech-heavy Nasdaq rose 2.9% and 4.2%, respectively.

That comes even as the market largely already priced in an impending 50-basis-point increase, with eyes turning toward how the Fed will behave in 2023 and beyond—and Goldman Sachs strategists forecasting in a Wednesday note a peak federal funds rate of 5% to 5.25% in May following three more 25-basis-point hikes.

Contra

Powell still floated a target inflation rate of 2%, far below the 6% his favored metric—the core personal consumption expenditures index—currently hovers at. “History cautions strongly against prematurely loosening policy,” Powell said after hinting at the December rate slowdown. “We will stay the course until the job is done.”

Key Background

The U.S. central bank has raised the federal funds rate by 75 basis points four times this year, bringing the target rate to 3.75% to 4%, the highest level since 2007. Powell’s speech followed a flurry of mixed economic data released earlier Wednesday. A pair of closely watched metrics tracking the labor market—ADP’s monthly jobs report and the Labor Department’s Job Openings and Labor Turnover Survey—revealed a slowing pace of hiring among private employers and fewer job vacancies last month. Both of those indicate the labor market is losing its strength, though LPL Financial’s chief economist, Jeffrey Roach, says, “The labor market is still too tight for central bankers.” And the Bureau of Economic Analysis’ upward revision of its U.S. gross domestic product estimate for the third quarter to 2.9% appears to reveal an economy that’s far from a recession. Though perhaps initially counterintuitive, signs of a resilient economy, such as sticky consumer spending and a strong labor market, are bad news for further rate hikes as Powell seeks to use his primary tool to drag the economy down to rein in inflation.

Tangent

Stocks typically swing wildly when Powell speaks, with major indexes falling about 3% on both August 26 and November 2 after the central bank chief dumped cold water on any hopes the time line for further rate hikes would be shorter than anticipated. The stock market has tanked as the Fed has raised rates, with major indexes on pace for their worst annual performance in over a decade, as higher borrowing costs drag on companies’ bottom lines.

Further Reading

Fed Chair Jerome Powell—Haunted By The Ghost Of Paul Volcker—Could Tank The Economy (Forbes)

Does The Fed Want You To Lose Your Job? It’s Complicated. (Forbes)