US Federal Reserve Chairman Jerome Powell cemented expectations that the US central bank would step down from its aggressive pace of tightening next month and presented a case for achieving lower inflation without tipping the economy into a deep recession.
Just how high rates would go and how long policymakers would hold them there depends on how the economic data roll in as officials fight the highest inflation in 40 years.
However, Powell, in a speech and question-and-answer session on Wednesday, offered guarded optimism that price pressures would slow, sending Wall Street sharply higher as investors cheered the lack of a sharper-edged message from the central bank head.
European and US stock futures rose with Asian equities yesterday after Powell signaled a slowdown in the pace of interest rate hikes and China appeared to soften its COVID-19 stance.
The US dollar fell against its Group-of-10 counterparts, with the yen speeding to a three-month high. US Treasury yields stabilized after large declines following Powell’s comments.
Powell’s remarks, as officials prepare to enter their blackout period ahead of the Fed’s meeting on Dec. 13 and 14, hardened bets they would downshift to a 50 basis-point rate increase after delivering four straight 75 basis-point moves.
The Fed’s actions — the most aggressive since the 1980s — have lifted the target range of its benchmark rate to 3.75 percent to 4 percent from nearly zero in March.
Powell said rates were likely to reach a “somewhat higher” level than officials estimated in September, when the median projection was for 4.6 percent next year.
Those projections are to be updated at this month’s meeting.
“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said at the Brookings Institution in Washington. “The timing of that moderation is far less significant than the questions of 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.”
He added that goods prices had decelerated and shelter inflation was also decreasing by some measures. On the other hand, service costs remain a challenge, particularly the cost of scarce labor to deliver them.
“It will take substantially more evidence to give comfort that inflation is actually declining,” he said. “The truth is that the path ahead for inflation remains highly uncertain.”
The data have shown “tentative signs” of moderating labor demand, he said.
However, more cooling is needed, and his remarks imply that the Fed would continue to raise rates until the three conditions — further deceleration of goods prices, lower shelter inflation and softening labor demand — fall clearly into place.
When asked if the Fed could reduce inflation without tipping the economy into a steep downturn, Powell said he was optimistic that it could do so.
“I do continue to believe that there is a path to a soft or a soft-ish landing,” Powell said, defining that as a slight rise in unemployment without a severe recession.
“The path is pretty clear: The labor market conditions soften, the goods inflation gets better, housing services inflation gets better,” he said.
“And you see inflation start to come down. I mean I think that is very plausible,” he added.
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