Powell Sees Higher Peak for Rates, Path to Slow Tempo of Hikes

(Bloomberg) — Federal Reserve Chair Jerome Powell opened a new phase in his campaign to regain control of inflation, saying US interest rates will go higher than earlier projected, but the path may soon involve smaller hikes.

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Addressing reporters Wednesday after the Fed raised rates by 75 basis points for the fourth time in a row, Powell said “incoming data since our last meeting suggests that ultimate level of interest rates will be higher than previously expected.”

Powell said it would be appropriate to slow the pace of increases “as soon as the next meeting or the one after that. No decision has been made,” he said, while stressing that “we still have some ways” before rates were tight enough.

“It is very premature to be thinking about pausing,” he said.

The Federal Open Market Committee said that “ongoing increases” will still likely be needed to bring rates to a level that are “sufficiently restrictive to return inflation to 2% over time,” in fresh language added to their statement after a two-day meeting in Washington.

The Fed’s unanimous decision lifted the target for the benchmark federal funds rate to a range of 3.75% to 4%, its highest level since 2008.

“Slower for longer,” declared JP Morgan Chase & Co, chief US economist Michael Feroli in a note to clients. “The Fed opened the door to dialing down the size of the next hike but did so without easing up financial conditions.”

Financial markets whipsawed on Powell’s message, which mixed a hawkish tilt toward higher rates with a dovish nod to a possible near-term downshift.

Initially stocks rallied and Treasury yields tumbled with the dollar on the statement, which hinted rate hikes were entering their final phase. Then, as Powell talked about a higher peak rate and said the Fed had a “ways to go” on tightening, yields and the dollar surged and stocks slipped. The S&P 500 suffered its worst rout on a Fed decision day since January 2021.

Officials, fighting to curb inflation running near a 40-year high, gathered days before midterm US congressional elections in which anger over price pressures has been a dominant theme.

The outcome of the Nov. 8 vote could cost President Joe Biden’s Democrats control of Congress, and some prominent lawmakers in his party have started to publicly urge the Fed to show restraint. Powell, for his part, has tried to keep the central bank out of the political fray.

Officials, as expected, said they will continue to reduce their holdings of Treasuries and mortgage-backed securities as planned — a pace amounting to about $1.1 trillion a year.

The higher rates go, the harder the Fed’s job becomes. Having been criticized for missing the stubbornness of the inflation surge, officials know that monetary policy works with a lag and that the tighter it becomes the more it not only slows inflation, but economic growth and hiring too.

Still, Powell stressed that they would not blink in their efforts to get inflation back down to their 2% target.

“The historical record cautions strongly against prematurely loosening policy,” he said. “We will stay the course, until the job is done.”

Fed forecasts in September implied a 50 basis points move in December, according to the median projection. Those projections showed rates reaching 4.4% this year and 4.6% next year, before cuts in 2024. Powell’s remarks made clear that the peak signaled in that projection would be higher if it came at this meeting.

What Bloomberg Economics Says…

“It’s not clear that members are of one mind on the pace of future increases. New guidance in the policy statement — which we interpret as an attempt to formally delink the rate-hike pace from contemporaneous economic data — suggests most committee members are in favor of laying the groundwork to eventually slow the hiking pace.”

— Anna Wong, Andrew Husby and Eliza Winger (economists)

— To read more click here

No fresh estimates were released at this meeting and they won’t be updated again until officials gather Dec. 13-14, when they will have two more months of data on employment and consumer inflation in hand.

Economists surveyed by Bloomberg late last month were looking for a 50 basis-point increase in December, but almost a third had penciled in a fifth 75 basis-point hike. They saw rates peaking at 5% next year. Investors saw the same thing, with pricing in financial futures markets leaning toward a 50 basis-point December hike and rates pushing a bit above 5% by mid-2023.

The Fed’s most forceful tightening campaign since the 1980s is beginning to cool some parts of the economy, particularly in housing. But policymakers have yet to see meaningful progress on inflation.

Nor has there been a significant loosening in the job market, with unemployment in September matching a half-century low of 3.5%.

Employer demand for workers has also remained strong, with 1.9 job vacancies for every unemployed person in America, according to Labor Department data Tuesday.

“The labor market remains extremely tight,” Powell said, adding that it “continues to be out of balance, with demand substantially exceeding the supply of available workers.”

(Updates with analyst reaction in the seventh paragraph.)