Federal Reserve Chair Jerome Powell indicated on Friday that the current interest rates could remain steady, with a possibility of an increase if the robust economic growth continues. His comments align with market expectations for no rate hike at the Federal Reserve meetings scheduled for October 31 and November 1.
Powell acknowledged that a sustained rise in long-term Treasury yields could reduce the need for future rate hikes. The decisions will be influenced by data, evolving outlooks, and risk balance. Following his speech, two-year Treasury yields declined while 10-year yields approached 5%. Concurrently, the dollar weakened against major currencies, and the S&P 500 index experienced a drop.
The Fed Chair's speech was briefly interrupted by protesters demanding an end to fossil finance but resumed after their removal. In September, the policy rate remained stable between 5.25% and 5.5%, with most officials advocating for another hike this year. Powell did not rule out further tightening, suggesting that persistent growth or labor market tightness could necessitate additional monetary policy tightening.
Core inflation has slowed to just below 4% annually and just below 3% on a three-month annualized measure. Recent data showed US retail sales surpassing forecasts and industrial production strengthening in September. Nonfarm payroll gains averaged 266,000 over the past three months, indicating robust economic activity.
Laura Rosner of Macropolicy Perspectives LLC interpreted Powell's stance as signaling a pause for November due to anticipated economic cooling in Q4. Powell warned about inflation volatility and suggested that the Fed’s rate hikes are exerting downward pressure on the economy, with significant tightening possibly still ahead.
Powell highlighted geopolitical tensions as key risks, describing them as “highly elevated.” He expressed concern over the attack on Israel and the potential loss of innocent lives. He noted signs of labor market cooling but reiterated that a sustainable return to 2% inflation would likely require below-trend growth and further labor market softening.
Chicago Fed President Austan Goolsbee emphasized the need to keep inflation expectations anchored to maintain credibility. Philadelphia Fed President Patrick Harker maintained his view that the central bank should hold steady interest rates but wouldn't hesitate to support more hikes if needed. Powell's tightening campaign has been the fastest since former Chair Paul Volcker's attack on inflation in the late 1970s.
A sudden rise in longer-term Treasury yields since July has led some Fed officials, such as Vice Chair Philip Jefferson, to focus more on overall financial conditions as they consider their next move. Powell attributed the surge mostly to the central bank’s quantitative tightening program and heightened focus on fiscal deficits.
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