Powell Will Prepare For Slowing Fed Rate Increases Despite Hawkish Tone

In addition to reiterating that the Federal Reserve will moderate the pace of interest rate rises starting next month, Chair Jerome Powell is anticipated to reiterate that the central bank’s battle against inflation will last until 2023. Powell will speak at a gathering on Wednesday in Washington, D.C., organized by the Brookings Institution, with a purported labor market focus. It will be one of the last statements by decision-makers prior to the beginning of a period of silence before their meeting on December 13–14.

The occasion gives Powell a chance to join other Fed officials in signaling that, following four straight increases of 75 basis points, the benchmark rate will be increased by 50 basis points at the year’s last meeting.

He will likely accompany any hint of a downshift with a warning that rates will need to climb even more next year because inflation is still significantly above the central bank’s 2% target.

According to Julia Coronado, founder partner at MacroPolicy Perspectives, “he’s probably going to utilize the speech to be hawkish and emphasize the aspects of imbalance in the labor market.” She suggested that Powell use these labor market trends as “justification for the need to be committed to a tight policy for longer.”

According to the pricing of contracts in futures markets, investors anticipate the Fed will slow down next month, with rates peaking at 5% next year from the current range of 3.75% to 4.00%.

These forecasts are consistent with Powell’s comments made during the Fed meeting earlier this month, in which he suggested that officials may slow the pace of rate rises as early as next month, even though they ultimately boost rates to a higher peak than they initially anticipated.

Michael Feroli, chief US economist at JPMorgan Chase & Co., said: “I don’t believe there’s a lot of heavy lifting to do in terms of putting the market in line with where they presumably see things going. According to the meeting minutes from Nov. 1-2, a “substantial majority” of officials agreed that it would soon be appropriate to reduce the pace of rate hikes. However, opinions on how high they will ultimately need to raise borrowing costs were less definite, with “different” policymakers seeing justification for doing so.

Advertisement

According to median predictions made by officials at a conference in September, rates would hit 4.4% by the end of this year and 4.6% by the end of the following year. These projections will be revised during the meeting the following month.

On the same day that Powell will be speaking, the Labor Department will release an update of its Job Openings and Labor Turnover Survey, or JOLTS. Powell frequently uses this report as proof that there is a significant labor shortage. Unexpectedly, the number of job vacancies grew in September, and a subsequent high reading might point to continued pay pressure.

Along with the upcoming inflation statistics, his comments will be made two days before the release of the November jobs report, which policymakers will also study before deciding on interest rates.

According to Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, financial conditions have improved since the Fed’s meeting in November, with stock markets soaring and risk spreads in bond markets contracting.

However, Powell is unlikely to specifically mention them in his remarks. Instead, he might restate what he stated earlier this month, which was that while authorities could soon employ smaller rate hikes, rates may need to go a little higher than anticipated to lower prices.

“I sense that he will have more or less done the job in terms of signaling,” said Stanley. “If people come away thinking that the Fed is going to hike rates to 5% or thereabouts, which I think is what he was kind of teasing in November.”

Read More Financial News Here

Advertisement