Powell Calls Talk of Cutting Rates 'Premature' and Says More Hiking is Possible

Federal Reserve Chairman Jerome Powell, in a speech at Spelman College in Atlanta, countered market expectations of imminent aggressive interest rate cuts, emphasizing that it is premature to declare victory over inflation. Powell, heading the Federal Open Market Committee (FOMC), indicated that the committee intends to maintain a restrictive policy until they are confident about inflation returning firmly to the 2% target.

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In prepared remarks, Powell cautioned against prematurely assuming that a sufficiently restrictive stance had been achieved, and he refrained from speculating on the timing of potential policy easing. He stated, "We are prepared to tighten policy further if it becomes appropriate to do so." Despite acknowledging that policy is currently in restrictive territory, Powell highlighted the delicate balance between doing too much or too little in addressing inflation risks.

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Following Powell's comments, financial markets responded positively, witnessing an upswing in major averages on Wall Street and a notable decrease in Treasury yields. Jeffrey Roach, Chief Economist at LPL Financial, interpreted Powell's remarks as a step toward a more dovish stance, contributing to market optimism.

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The prevailing market sentiment has been influenced by expectations that the Federal Reserve has concluded its rate-hiking cycle and may adopt an easing posture in 2024. This anticipation has fueled a robust rally on Wall Street, propelling the Dow Jones Industrial Average up over 8% in the past month to attain a new high for 2023.

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Powell's statements lent credibility to the notion that the Fed, having undertaken a series of rate hikes since March 2022, may be concluding its tightening phase due to its impact on economic activity. He acknowledged the careful approach, recognizing that risks of both under- and over-tightening are becoming more balanced.

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Highlighting the uncertainty surrounding the economic outlook, Powell referred to elevated uncertainties as the effects of the pandemic and the reopening continue to unfold. He suggested that, like other forecasters, the Fed anticipates a slowdown in spending and output over the next year, influenced by the waning effects of the pandemic and the impact of restrictive monetary policy on aggregate demand.

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Powell addressed recent inflation data, noting that the Fed's preferred inflation gauge, personal consumption expenditures prices, was up 3% from a year ago and 3.5% on a core basis, excluding volatile food and energy prices. Despite a decline in energy prices contributing to inflation easing, Powell stressed that current levels remain "well above" the central bank's goal.

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Acknowledging the progress in lower inflation readings, Powell emphasized the need for continued progress toward the 2% inflation objective. He highlighted that while inflation is still above target, the direction is positive, signaling the importance of careful consideration based on evolving data.

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Having implemented 11 interest rate hikes in response to the highest inflation levels since the early 1980s, the Fed's policy rate currently stands at the highest level in 22 years. Powell acknowledged that the impact of the tightening measures may not have been fully realized yet, as the lag effect of monetary policy on economic conditions takes time.

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Market pricing on Friday indicated a belief that the Fed is done hiking, with expectations of potential cuts as early as March 2024. Futures markets are pointing to a cumulative reduction of 1.25 percentage points by the end of the year, equivalent to five quarter-point cuts. However, Powell emphasized the Fed's commitment to data-dependent decision-making and gave no indication of a preset course, reiterating a meeting-by-meeting approach based on incoming data and economic outlook.

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Addressing the labor market, Powell characterized it as "very strong," although he acknowledged a moderated pace of job creation contributing to the alignment of supply and demand. The next FOMC meeting is scheduled for December 12-13, and Powell's remarks underscored the central bank's cautious stance amid evolving economic conditions.