Powell Sees Higher Peak for Rates, Path to Slow Tempo of Hikes

The higher rates go, the harder the Fed’s job becomes. Having been criticized for missing the stubbornness of the inflation surge, officials know that monetary policy works with a lag and that the tighter it becomes the more it not only slows inflation, but economic growth and hiring too.

Still, Powell stressed that they would not blink in their efforts to get inflation back down to their 2% target.

“The historical record cautions strongly against prematurely loosening policy,” he said. “We will stay the course, until the job is done.”

Fed forecasts in September implied a 50 basis points move in December, according to the median projection. Those projections showed rates reaching 4.4% this year and 4.6% next year, before cuts in 2024. Powell’s remarks made clear that the peak signaled in that projection would be higher if it came at this meeting.

What Bloomberg Economics Says

“It’s not clear that members are of one mind on the pace of future increases. New guidance in the policy statement — which we interpret as an attempt to formally delink the rate-hike pace from contemporaneous economic data — suggests most committee members are in favor of laying the groundwork to eventually slow the hiking pace.” — Anna Wong, Andrew Husby and Eliza Winger (economists)

No fresh estimates were released at this meeting and they won’t be updated again until officials gather Dec. 13-14, when they will have two more months of data on employment and consumer inflation in hand.

Economists surveyed by Bloomberg late last month were looking for a 50 basis-point increase in December, but almost a third had penciled in a fifth 75 basis-point hike. They saw rates peaking at 5% next year. Investors saw the same thing, with pricing in financial futures markets leaning toward a 50 basis-point December hike and rates pushing a bit above 5% by mid-2023.

The Fed’s most forceful tightening campaign since the 1980s is beginning to cool some parts of the economy, particularly in housing. But policymakers have yet to see meaningful progress on inflation.

Nor has there been a significant loosening in the job market, with unemployment in September matching a half-century low of 3.5%.

Employer demand for workers has also remained strong, with 1.9 job vacancies for every unemployed person in America, according to Labor Department data Tuesday.

“The labor market remains extremely tight,” Powell said, adding that it “continues to be out of balance, with demand substantially exceeding the supply of available workers.”

(Image: Bloomberg)