Jay Powell signals Fed will slow pace of rate rises next month

Jay Powell sent a strong signal that the Federal Reserve will slow the pace of interest rate rises next month in an otherwise hawkish speech warning the US central bank has a long way to go in its fight against inflation.

“The time for moderating the pace of rate increases may come as soon as the December meeting,” the Fed chair said during an appearance at the Brookings Institution on Wednesday.

The remarks from Powell suggest the Fed is gearing up to “downshift” to a 0.5 percentage point increase when it gathers in two weeks after it raised rates by 0.75 percentage points at each of its past four meetings.

“My colleagues and I do not want to overtighten,” Powell added in a question-and-answer session following the speech.

Stocks rose to session highs following the remarks while the two-year Treasury yield, which moves with interest rate expectations, fell slightly.

“I will simply say that we have more ground to cover,” the Fed chair said. “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

Powell’s remarks fuelled a market rally, with the S&P 500 on course for its first stretch of back-to-back monthly gains since summer last year, as investors wager the Fed is losing the stomach for its fight against higher prices.

Investors were buoyed by the October inflation report, published earlier this month, which undershot expectations for the first time in months.

But Powell on Wednesday cautioned against reading too much into one month of data, instead stressing it would take “substantially more evidence to give comfort that inflation is actually declining”.

He warned that while inflation forecasts from the Fed and others pointed to a “significant decline over the next year”, the central bank had been repeatedly wrongfooted by incorrect projections in the past.

“The truth is that the path ahead for inflation remains highly uncertain,” he said, adding the Fed had not yet seen “clear progress” of slower inflation.

In a wide-ranging speech about the outlook for monetary policy, Powell said that in order to bring inflation back down to the Fed’s 2 per cent target, the labour market must become substantially softer and there would need to be a “sustained period of below-trend growth”.

He said that job gains still remain far too high, at about 290,000 positions per month over the past three months. And wage growth remains well above the figure that would correspond to inflation falling back to target, he added.

In a discussion after the speech, Powell said the Fed could damp demand for workers without causing a material rise in the unemployment if companies opted to cut vacancies rather than making workers redundant.

He said the Fed could ease off the pace of rate rises as soon as its next meeting in December. But the “timing of that moderation is far less significant than . . . how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level”.

Powell reiterated that the end point of the tightening cycle would probably need to be higher than forecasted in projections released in September, which suggested most officials anticipated a so-called terminal rate of 4.6 per cent.

Fed officials are still unanimous in their view that inflation remains too high and that they will need to tighten policy further. But divisions have started to emerge over how much more restraint to apply to the economy next year given early indications that higher borrowing costs are starting to bite consumers and businesses.