Powell: Rate hikes may slow, but inflation fight hardly over

WASHINGTON — Federal Reserve Chair Jerome Powell sought Wednesday to strike a delicate balance at a moment when high inflation is bedeviling the nation’s economy and commanding a central role in the midterm elections.

Powell suggested that the Fed may decide in coming months to slow its aggressive interest rate increases. He also stated that the Fed is not close to declaring victory in its fight against an inflation rate that has been at or near four-decade highs, and has shown little signs of ebbing.

The Fed announced Wednesday that it would increase its benchmark rate by three-quarters of an inch for the fourth consecutive policy meeting. The Fed’s key rate is now at 3. 75% to 4.4%, the highest rate in 15 year.

This was the sixth rate hike by the central bank this year. This streak has made mortgages and other consumer loans more expensive and increased the risk of a downturn. The Fed’s statement suggested that it would take a more deliberate approach when raising rates, likely leading to lower borrowing costs. It would recognize that rate hikes are slowing down inflation and take time to feed the economy. The initial reaction of the financial markets was to the possibility that the Fed might slow down its rate hikes. However, bond and stock prices continued to rise.

But as Powell’s news conference began, he took a more difficult line. Powell stressed that the Fed’s policymakers had not made much progress in controlling inflation and that they would likely have to raise rates even higher than they did at their September meeting.

” We still have a lot to do,” he stated. “Incoming data from our last meeting suggests that officials may have to raise rates more than the 4.6% they predicted in September.”

The Fed chair emphasized that it would not be prudent to stop rate increases. He stated that inflation pressures remain too high.

The abrupt shift in tone caused financial markets whiplash. Stocks reversed their gains quickly and plunged to the close of trading. The Dow Jones Industrial Average finished the day with a loss of 500 point, or 1.5%.

” Vince Reinhart, chief economist at Dreyfus & Mellon, stated that he believes he has achieved his goal of striking hawkish / dovish notes. (“Hawks”) prefer higher rates to combat inflation, while “doves”) tend to favor lower rates to support employment. “That’s why the market was so confused.”

The Fed’s meeting occurred as financial markets and many economists have grown nervous that Powell will end up leading the central bank to raise borrowing costs higher than needed to tame inflation and will cause a painful recession in the process.

Powell impliedly addressed these fears at his news conference. He left the door open for a half-point increase to the Fed’s December meeting. The central bank could then reduce its rate hike to a quarter-point, which is a smaller rate hike than usual, early next year.

” “At some point, it will be appropriate to slow down the pace of increases,” he stated. It is coming soon, and it could happen as soon as the next meeting or after that. No decision has been made.”

At the same time, Powell noted that the job market remains strong, which means many businesses must raise pay to keep workers — raises that are often passed on to consumers in the form of higher prices.

This week, the government reported that there were more job openings for September than August. There are currently 1.9 jobs available for every unemployed worker. This is a rare supply which fuels higher pay increases and adds inflationary pressures.

Overall, Powell said the Fed has made little progress against inflation so far.

“We believe we have a way to go, and we have some ground for interest rates,” he said.

The persistently high prices and higher borrowing costs are putting pressure on American households and has made it difficult for Democrats to campaign on the state of the job market, as they attempt to retain control of Congress. In the lead-up to Tuesday’s midterm elections, Republican candidates have attacked Democrats over the severe impact of inflation.

“Chair Powell remained consistent with this message: “We’re not done yet, because of high inflation and a strong determination to bring it down,” Sal Guatieri (senior economist at BMO Capital Markets Economics) wrote in a note. “But we may not need to keep cranking rates aggressively, due to an economy that has slowed significantly from last year and long-term inflation expectations that are still ‘well anchored.’ “

Typically, the Fed raises rates in quarter-point increments. After misjudging inflation last year to be temporary, Powell has led Fed to raise rates aggressively in an effort to slow borrowing and spend and ease price pressures.

The average rate on a 30-year fixed mortgage, just 3. 14% a year ago, surpassed 7% last week, mortgage buyer Freddie Mac reported. Eight consecutive months have seen a drop in sales of existing homes.

The policymakers may think they can slow down the pace of rate hikes soon because early signs indicate that inflation could begin to decline in 2023. The high cost of loans and high prices are limiting consumer spending. The supply chain snarls are decreasing, which means that there are fewer shortages of parts and goods. Wage growth is slowing. If there are no further declines in inflation, it will reduce inflationary pressures.

Outside the United States, many other major central banks are also rapidly raising rates to try to cool inflation levels that are even higher than in the U.S.

Last week, the European Central Bank announced its second consecutive jumbo rate hike, increasing rates at the fastest pace in the euro currency’s history to try to curb inflation that soared to a record 10.7% last month.

Likewise, the Bank of England is expected to raise rates Thursday to try to ease consumer prices, which have risen at their fastest pace in 40 years, to 10.1% in September. Both Europe and the U.K. are sliding towards recession even as they raise rates to combat inflation.