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Fed’s Powell: Rate hikes too slow, but adjustment is just beginning

Markets
By Sydney Barrett
Reuters

  1. PMN business

Reuters

Howard Schneider and Ann Sapphire

Publication date:

November 30, 2022 • 0 minutes ago • 4 minutes read Join the conversation

Federal Reserve Chair Jerome Powell on Wednesday said it was time to slow the pace of coming rate hikes while signaling a protracted economic adjustment to a world where borrowing costs remain high and inflation is slowly coming down and the United States suffers from chronic labor shortages.

In an hour-long session of prepared remarks and questions at the Brookings Institution think tank — his last scheduled appearance before the next Fed meeting in two weeks — Powell delivered a short-term message that sent markets surging: The Fed was “slowing down break” from the breakneck pace of three-quarters-of-a-point rate hikes that have prevailed since June and would grope its way towards the top rate needed to slow inflation to the Fed’s 2% target.

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But he also outlined longer-term shifts that may be underway — particularly in labor supply — that could herald a prolonged period of high interest rates and inflation that is slow to respond to Fed policy tightening. At the same time, he dismissed the idea that the central bank was so intent on calming the highest inflation in 40 years that policymakers would “destroy” the economy in the effort, insisting that a “soft or gentle” landing should take place with inflation, relaxation is possible without a dramatic increase in unemployment.

“We wouldn’t… try to crash the economy and then clean it up afterwards,” Powell said, with policymakers hoping “not to pull too tight… because we think cutting rates isn’t something we want to do anytime soon.” . Therefore, we are slowing down and will try to find the right level that will lower inflation over time.

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Taken together, the comments indicated that the Fed is grappling with some of the longer-term trends that have been exacerbated by the pandemic, particularly the demographic burden that an aging population, COVID-era pensions and weak immigration are putting on the workforce.

These won’t be reversed anytime soon, Powell said, acknowledging that a tight labor market will need to be balanced primarily through Fed measures that reduce demand for labor — either through a drop in job vacancies or, some fear, a one rise in unemployment.

“I think we have to assume for now” that the labor supply isn’t going to recover, Powell said. “We must do what it takes to rebalance the labor market, to get back to 2% inflation…really just by slowing job growth, rather than putting people out of work.”

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These types of structural concerns have been at the back of the Fed debate since the early days of the pandemic but are coming to the fore.

Concerns about global supply chains, for example, were initially seen as fleeting, likely to pass and help fix high inflation as they did.

But progress has been slower than expected as China in particular is now undergoing back-to-back lockdowns that have made it a less secure source of goods and US labor force participation remains low.

“FURTHER WAY TO WALK”

Powell’s comments about an impending slower rate hike sparked a sharp rally in stock and bond markets, which have been hit hard this year by the Fed’s aggressive rate hikes.

The benchmark S&P 500 index shot into positive territory to close 3.09% higher and bond yields, moving in the opposite direction to their prices, all plummeted. The yield on the 2-year Treasury note, the maturity most sensitive to Fed interest rate expectations, fell to around 4.37% from 4.52%. The dollar weakened against a basket of currencies from major trading partners.

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In interest rate futures markets, traders added to prevailing bets that the Fed would slow its rate hike pace at its meeting in two weeks.

“They can’t raise rates as fast as they did,” said Rick Meckler of Cherry Lane Investments in New Vernon, New Jersey. “However, investors always like the convenience of hearing it straight from the (Fed) Chair.”

Still, and despite the impending slowdown in the pace of rate hikes, Powell said it remains an open question “how much further we need to raise rates to control inflation, and how long it will be necessary to maintain tightening policies.” hold.”

While the Fed chair didn’t provide his estimated “final rate,” Powell said it will likely be “slightly higher” than the 4.6% indicated by policymakers in their September forecasts. He said curing inflation “requires keeping policies at restrictive levels for some time,” a comment that leaned against market expectations that the Federal Reserve could start cutting interest rates next year as the economy slows .

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The central bank will meet again on December 13th and 14th. Along with agreeing on an expected half-point rate hike, policymakers will issue new forecasts for interest rates, economic growth, inflation and unemployment over the coming years.

With the half a percentage point hike imminent, the central bank will have raised its federal funds rate from near zero to the 4.25% to 4.50% range as of March, the fastest rate change since former Fed Chair Paul Volcker made one Even worse was inflation.

However, this has not yet had a convincing impact on inflation. Powell said the Fed’s October inflation estimates showed its preferred measure still rose to about three times the central bank’s 2% target.

He noted that while commodity inflation has eased, housing costs are likely to continue rising into next year while key service price measures are high and the labor market is tight. Data released on Wednesday showed there were still about 1.7 job openings for every unemployed person.

“Despite some promising developments, we still have a long way to go to restore price stability,” Powell said. “We will stay the course until the job is done.” (Reporting by Howard Schneider; Additional reporting by Caroline Valetkevitch; Editing by Paul Simao and Andrea Ricci)

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