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Federal Reserve Chair Jay Powell has warned the Federal Reserve of the danger of being “misled” by good price data and said it is on a mission to return inflation to its 2 percent target , is still “a long way to go”.
At an IMF event on Thursday, the Fed chair said officials were “pleased” by the decline in price pressures but had not given the all-clear to an inflation problem that has proven more persistent than policymakers expected.
“We know that further progress toward our 2 percent target is not assured: inflation has given us some misconceptions,” he said in prepared remarks. “If it is appropriate to further tighten the policy, we will not hesitate to do so.”
Powell stressed that the Fed will continue to proceed “cautiously” to “counteract both the risk of being misled by a few months of good data and the risk that the central bank will have to raise interest rates again immediately. The danger of over-tightening.”
Powell’s comments, which were briefly interrupted by climate protesters, follow the central bank’s recent monetary policy meeting, where officials extended a pause in their historic campaign to tighten monetary policy.
The decision to keep the key interest rate steady at the 22-year high of 5.25 to 5.5 percent for the second straight day reflected officials’ greater caution in the face of a variety of headwinds that are widely expected they will slow growth from a breakneck 4.9 percent. In the third quarter, the annualized pace recorded an increase of 1.5 percent.
The resilience of the U.S. economy this year has been “remarkable,” Powell said in the post-event discussion on Thursday, especially given what he described as “significantly restrictive policies.”
U.S. stocks and government bonds extended losses on Thursday after Powell’s comments, with the benchmark S&P 500 closing down 0.8 percent.
Government bonds remained under pressure, with the 30-year Treasury yield rising 0.12 percentage points to 4.78 percent intraday and the benchmark 10-year Treasury yield rising 0.13 percentage points to 4.64 percent. Bond yields move in the opposite direction to prices.
The moves followed an auction of 30-year Treasury bonds earlier in the day. Market participants also said a ransomware attack on the Industrial and Commercial Bank of China on Thursday disrupted the settlement of treasury transactions.
Despite further signs that the labor market is losing momentum, officials were cautious in declaring that interest rates were “sufficiently restrictive.” Powell reiterated that the Fed is “not confident” that it has reached that point yet.
Fluctuating global borrowing costs have further complicated this assessment. The recent rise in long-term interest rates, which had gained momentum ahead of the latest Fed meeting, has largely been reversed. The benchmark 10-year Treasury note is trading about half a percentage point lower than its peak in October.
In response to a question from the audience, Powell said the Fed would not ignore “a significant tightening in financial conditions” driven by higher Treasury yields. However, he reiterated that the policy implications would largely depend on how long the market movement lasts.
“We recognize the risk that stronger growth could undermine further progress in rebalancing the labor market and reducing inflation, which could justify a monetary policy response,” Powell added.
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Still, traders in federal funds futures markets generally believe the federal funds rate has peaked, and the debate is shifting to when the central bank will begin cutting.
In the same panel, Gita Gopinath, the IMF’s first deputy managing director, warned central bankers against “premature” monetary easing, while stressing that communication challenges will be particularly difficult.
“On the one hand you see that inflation is going in the right direction, but on the other hand you realize that this step is probably going to be the most difficult,” she said.
Meanwhile, the Fed noted in a report released Thursday that banks largely have “ample liquidity and limited reliance on short-term funding.”
Loan defaults have started rising from very low levels and higher interest rates are weighing heavily on some weaker lenders, it said. However, it concluded that the banking system remained “sound overall”.
Additional reporting by Harriet Clarfelt
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