US interest rate hike: Powell sees higher spike for rates - BNN Bloomberg

Federal Reserve Chairman Jerome Powell has opened a new phase in his campaign to regain control of inflation, saying US interest rates will go higher than expected, but the path could soon involve more small increases.

Speaking to reporters on Wednesday after the Fed hiked rates 75 basis points for the fourth straight time, Powell said “incoming data since our last meeting suggests the ultimate level of interest rates will be higher provided that”.

Powell said it would be appropriate to slow the pace of increases “from the next meeting or the one after. No decision has been made,” he said, while emphasizing that “we still have a ways to go” before rates get tight enough.

“It’s very premature to think about taking a break,” he said.

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

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

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

Financial markets turned away from Powell’s message, which mixed a hawkish tilt toward higher rates with a dovish nod to a possible near-term downturn.

Initially, stocks rallied and Treasury yields fell along with the dollar on the statement, suggesting rate hikes were entering their final stages. Then, as Powell spoke of a higher peak rate and said the Fed had “some way to go” on tightening, yields and the dollar surged and stocks fell. The S&P 500 suffered its worst rout on a Fed decision day since January 2021.

Officials, struggling to rein in inflation near a 40-year high, met days before the U.S. congressional midterm 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 begun publicly urging the Fed to exercise restraint. Powell, for his part, tried to keep the central bank out of the political fray.

As expected, officials said they would continue to reduce their holdings of Treasuries and mortgage-backed securities as planned, at a rate of about $1.1 trillion per year.

The higher rates rise, the more difficult the Fed’s task becomes. After being criticized for missing the stubbornness of the inflation spurt, officials know that monetary policy works with a lag and that the tighter it gets, the more it not only slows inflation but also economic growth and hiring.

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

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

The Fed forecast in September implied a move of 50 basis points in December, according to the median projection. These projections showed rates reaching 4.4% this year and 4.6% next year, before cuts in 2024. Powell’s remarks made it clear that the peak reported in this projection would be higher if it occurred during of this meeting.

What Bloomberg Economics says

“It is not clear that members agree on the pace of future increases. New directions in the policy statement — which we interpret as an attempt to formally decouple the pace of rate hikes from contemporary economic data — suggest most committee members are in favor of laying the groundwork for possibly slowing the pace. of the rise.

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

No new estimates were released at this meeting and they will not be updated until officials meet on December 13-14, when they will have two more months of employment and employment data. consumer inflation.

Economists polled by Bloomberg late last month had been looking for a 50 basis point hike in December, but nearly a third had forecast a fifth hike of 75 basis points. They saw rates peak at 5% next year. Investors saw the same thing, with prices in financial futures markets tilting towards a 50 basis point rise in December and rates pushing just above 5% by mid-2023.

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

There has also been no significant slack in the labor market, with unemployment in September matching a half-century low of 3.5%.

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

“The labor market remains extremely tight,” Powell said, adding that it “continues to be unbalanced, with demand far outstripping the supply of available workers.”