Investors Cheer as Jerome Powell Says Pace of Rate Hikes Could Slow in December
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Federal Reserve Chair Jerome Powell sent financial markets rallying on Wednesday after he indicated that the central bank could slow the pace of interest rate hikes as early as the next policy meeting.
Speaking at the Brookings Institution, Powell attempted to balance his dovish remarks with a hawkish inflation-busting stance.
The head of the U.S. central bank noted that the benchmark federal funds rate would have to climb higher than what policymakers initially thought a few months ago. He also cautioned “against prematurely loosening policy,” dismissing talk of potential rate cuts in 2023.
Powell noted that monetary policy impacts inflation and the broader economy with “uncertain lags,” adding that the full impact of the Fed’s tightening since March has yet to be fully felt.
“The time for moderating the pace of rate increases may come as soon as the December meeting. Given our progress in tightening policy, 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. It is likely that restoring price stability will require holding policy at a restrictive level for some time,” Powell stated.
“We will stay the course until the job is done.”
The Federal Open Market Committee (FOMC) estimates that the 12-month personal consumption expenditures (PCE) price index, which is the central bank’s preferred inflation measurement, ran at 6 percent through October. Although October inflation numbers were “a welcome surprise,” Powell noted that this was a single month’s data.
“It will take substantially more evidence to give comfort that inflation is actually declining,” Powell said. “By any standard, inflation remains much too high.”
The annual inflation rate eased to 7.7 percent in October, while the core inflation rate, which eliminates the volatile energy and food sectors, slowed to 6.3 percent.
Labor Market Conditions
On the labor front, Powell purported that the latest data show “only tentative signs of rebalancing as job openings outnumber available workers by a 1.7 to 1 margin. He added that “excess retirements” have contributed to the imbalance between job openings and available talent.
Still, accomplishing price stability will be crucial for “a sustained period of strong labor market conditions that benefit all.”
According to the ADP National Employment Report for November, private sector employment rose by 127,000 jobs, slowing by the most since January 2021. The manufacturing sector lost 100,000 jobs, followed by professional and business services (negative 77,000), financial activities (negative 34,000), and information (negative 25,000).
Wall Street Reacts
Investors cheered the speech as the leading stock market benchmarks surged. The Dow Jones Industrial Average advanced 2.18 percent, the S&P 500 rose 3.09 percent, and the Nasdaq Composite Index spiked 4.41 percent.
The U.S. Dollar Index (DXY), a gauge of the greenback against a basket of currencies, erased its gains and turned negative at the closing bell.
Treasury yields were mixed as long-term bonds slumped, with the benchmark 10-year yield shedding 7.2 basis points to 3.701 percent.
Bryce Doty, a senior vice president and senior portfolio manager at Sit Investment Associates, thought it was an effective speech that appeared similar to how former Fed Chair Alan Greenspan would communicate.
“Greenspan was effective at educating people on nuances in economic measurements and Powell certainly had a Greenspan-like moment when we went into some depth to explain how the six to twelve month lag in lease renewals falsely gives the impression that housing costs are still rising rapidly,” Doty wrote in a note.
“He further explained how by looking at new lease rates, it is apparent the housing inflation is subsiding rapidly. This greatly reduces the pressure on the Fed to continue to raise rates aggressively and finally is more consistent with the obvious reality all the rest of us are experiencing in real time.”
Ed Yardeni of Yardeni Research explained in an analysis of Powell’s speech that the “markets took comfort from Powell’s suggestion that the Fed’s tightening cycle is pivoting to a more moderate stance of rate increases.”
Peter Schiff, the chief economist and global strategist at Euro Pacific Capital, thinks traders “are no longer buying what Powell is selling.
“Today he was as hawkish as ever, but the #dollar tanked, and #gold & #stocks rallied. Powell’s resolve to fight #inflation is contingent on a soft landing. Not only will the #economy crash, it’ll be another financial crisis,” Schiff tweeted.
For top economist Mohamed El-Erian, Powell’s comments spotlight a concerning communication challenge facing the Federal Reserve.
“The more the Chair tilts his remarks dovish, the greater the loosening of financial conditions and, potentially, the bigger the risk to meeting the inflation objective,” he tweeted.
After Powell’s prepared remarks, expectations that the FOMC would pull the trigger on a half-point rate hike at the December policy meeting remained relatively the same at around 75 percent, according to the CME FedWatch Tool.
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Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of “The War on Cash.”
