- Powell says Fed may slow pace of hikes but raise target
- Economists expect Fed to slow or halt quantitative tightening by mid-2023
- Japan maintains low rates and supports yen as it hints at policy tweaks
The US Federal Reserve is setting the pace for most major central banks, hiking interest rates three-quarters of a percentage point at a time as Chairman Jerome Powell has promised to raise the target on increases and investors expect the policy rate to top 5% by next spring.
No more talk of any immediate pivot away from tightening monetary policy as inflation and employment both continue to rise at robust rates. The hike last week put the target for the fed funds rate at 3.75% to 4.0%.
Powell suggested that the Fed could slow down the pace of rate increases starting at its December meeting but urged investors to focus on the endpoint for rates, which will go higher and make it ever more difficult to avoid a hard landing for the US economy.
"We have a ways to go," Powell said at Wednesday's press conference, following the two-day meeting of the rate-setting Federal Open Market Committee.
"I would want people to understand our commitment to getting this done. And to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon."
The Bank of England followed suit on Thursday with its own three-quarter percentage point increase, while the European Central Bank continued to play catch-up with its own 75 basis-point (bp) hike the previous week.
What choice do they have? Both central banks face their own raging inflation, aggravated by the energy shortages from Russia's strategy of punishing the West for sanctions against the Ukraine war. The central banks can't afford to lose more ground as the Fed continues to push up the dollar with its rate increases.
The US dollar has eased slightly but Dutch bank ING this week forecast continued dollar strength as it predicted the euro rate could slip below 0.95 against the dollar.
Meanwhile, bank economists are speculating that the Fed may have to stop running off its bond portfolio by the middle of next year, even though it raised the cap for not reinvesting proceeds from maturing bonds to $95 billion a month from $47.5 billion in September.
Their reasoning is that a halt to rate increases in the middle of next year would entail a change to quantitative tightening, as this process is known. Also, analysts worry that the runoff could reduce bank reserves too quickly.
The Bank of Japan is sticking to its policy of keeping rates low, parting ways with the ECB and Bank of England, which are matching Fed rate hikes. Japan spent $43 billion in October to support the yen, keeping the Japanese currency below 150 to the dollar in its first currency market intervention since 1998.
Western analysts say the currency could go lower, increasing above 150 to the dollar. Finance Minister Shun'ichi Suzuki said last week the government would be vigilant in monitoring pressure from the Fed moves.
Central bank Governor Haruhiko Kuroda last week hinted that inflationary pressures from the weak yen could force the bank to slightly modify its policy of yield curve control, by which the bank keeps short-term interest rates at minus 0.1% and the 10-year bond yield at zero. But Japan would keep to its accommodative policy.