FED Chairman Jerome Powell dismissed market speculations of imminent interest rate cuts, asserting that it is premature to consider such measures amidst persistent inflation concerns. Powell emphasized the Federal Open Market Committee's commitment to maintaining a restrictive policy until convinced that inflation is firmly on track to reach the 2% target.
"Prematurely concluding that we have achieved a sufficiently restrictive stance or speculating on when policy might ease would be premature," Powell stated, highlighting the central bank's readiness to further tighten policy if deemed necessary.
Despite acknowledging that policy is already well into restrictive territory, Powell emphasized the delicate balance of risks between taking decisive action and exercising caution on inflation. Market sentiments reacted positively to Powell's remarks, witnessing a surge in major averages on Wall Street and a notable decrease in Treasury yields.
Jeffrey Roach, Chief Economist at LPL Financial, noted, "Markets interpret today's comments as inching toward the dovish camp," reflecting the prevalent belief that the Fed is moving away from rate hikes and leaning towards an easing posture in 2024.
Powell's comments added weight to the notion that the Fed may have concluded its hiking cycle, considering the recent impact of successive rate hikes on economic activity. Powell remarked, "Having come so far so quickly, the FOMC is moving forward carefully, as the risks of under- and over-tightening are becoming more balanced."
Addressing uncertainties in the economic outlook, Powell highlighted the ongoing unwinding of pandemic-related effects, emphasizing the unusually elevated uncertainty surrounding the economy's trajectory. He anticipated a slowdown in spending and output growth over the next year due to the fading effects of the pandemic and the impact of restrictive monetary policy.
A recent Commerce Department report revealed a 3% year-over-year increase in personal consumption expenditures prices, the Fed's preferred inflation gauge. However, Powell emphasized that current levels remain "well above" the central bank's goal, cautioning that progress in lowering inflation must continue.
"Inflation is still running well above the target, but it's moving in the right direction," Powell asserted. "So we think the right thing to be doing now is to be moving carefully, thinking carefully about how things are going, letting the data tell us what the story is."
After a series of 11 interest rate hikes to counter the highest inflation levels since the early 1980s, the Fed has kept rates steady in its past two meetings. Powell acknowledged the impact of these measures, noting that tight monetary policy is exerting downward pressure on economic activity and inflation.
Despite market expectations indicating an end to rate hikes and potential cuts in 2024, Powell and other officials have not signaled any commitment to such a course. Powell emphasized the data-dependent nature of their decisions, stating, "We are making decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks."
As the Federal Reserve's next meeting approaches on December 12-13, market participants remain vigilant for further insights into the central bank's stance on monetary policy amid evolving economic conditions.
