Federal Reserve Chairman Jerome Powell recently addressed the ongoing speculation surrounding potential interest rate hikes from the central bank. Despite expectations for a rate-hike pause in December, Powell’s comments indicate that further rate increases are still a possibility.
During a press conference following the close of the two-day November meeting, Powell was expected to provide insight that would challenge the prevailing belief that the Fed had reached the end of its rate-hiking cycle, despite indications of inflation, a strong economy, and a tight labor market.
However, Powell failed to provide any definitive statements on the matter. Instead of reiterating the Fed’s previous stance that the risks of not acting were greater than those of taking action, Powell stated that these risks are becoming more balanced. He expressed satisfaction with progress on inflation and wage growth, emphasizing that current interest rates are already restrictive.
Furthermore, Powell downplayed the significance of the Fed’s quarterly projections for the federal-funds rate, commonly known as the “dot plot.” Previously, this projection suggested a potential quarter-point rate hike by the end of the year.
However, Powell stated that the efficacy of the dot plot diminishes over time between meetings and clarified that these projections are not set in stone or indicative of a future plan.
Taking all of this into account, it appears that Powell has raised the bar for any future interest rate hikes above the current level of 5.25% to 5.5%. Given rising bond yields, tightening financial conditions, and cooling inflation, it is uncertain whether this new threshold for rate hikes will ever be met.
Investors React Positively to Federal Reserve’s Press Conference
Investors are showing optimism following the Federal Reserve’s press conference, which concluded with indications that the central bank is likely to hold rates steady in December. According to the CME FedWatch tool, investors are now pricing in an 82% chance of no rate change, up from a 70% chance a day prior.
Wells Fargo chief economist Jay Bryson notes that the Federal Open Market Committee (FOMC) seems to be in a “hold” mode, characterized by a hawkish stance rather than a simple pause. Although Chair Jerome Powell did not completely rule out the possibility of another rate hike, he emphasized the committee’s inclination towards further tightening and the absence of talks about rate cuts.
While a third consecutive pause in December is not off the table, Powell suggests that the committee remains open to hiking rates again in January if circumstances warrant it. The FOMC is far from considering rate cuts, Powell clarifies.
According to Steve Englander of Standard Chartered Bank, Powell was careful to emphasize that the FOMC was not considering cutting rates but did not appear particularly eager to continue hiking them either.
Factors that could lead to another rate increase exist, such as recent increases in bond yields tightening financial conditions. However, Powell notes that it remains uncertain whether this trend will persist, and a reversal could necessitate further policy tightening. Inflation could also rise as the year progresses, with potential wage growth and increased spending driving above-potential economic growth.
Powell highlights that the committee is taking each meeting step by step. However, given the current trajectory of data, a rate hike in the near term seems unlikely.
The stage now seems set for the next meeting, which will further clarify the Federal Reserve’s monetary policy decisions.