Powell’s Latest Speech Indicates Smaller Interest Rate Hikes In Effort To Improve Price Stability

u.s. Washington, d.c. Fed Interest Rate Hike - 03 Nov 2022
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The long-awaited Federal Reserve pivot might finally happen in December, as Chair Jerome Powell said it would make sense to moderate the pace of rate increases. Amid persistent inflation and an economy showing little signs of cooling down, all eyes were on Powell’s Brookings Institute speech for hints as to which direction the Fed would be taking at its December meeting.

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Speaking on Nov. 30, Powell said that while inflation remains far too high, monetary policy affects the economy and inflation with uncertain lags. In turn, he stated, “it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.”

In November, the Fed unanimously raised interest rates by three-quarters of a percentage point rate — the fourth consecutive hike.

Rusty Vanneman, chief investment strategist at Orion Advisor Solutions, said there was no real surprise to Powell’s speech. “The market believes that the odds of a 50 bps increase in December have increased and I agree given Powell’s comments today,” he said.

“The Fed is going to continue raising short-term rates until the inflation data decisively moves lower. We’re not even close to that point yet. Not only is inflation expected to remain stubbornly high in the near-term, but economic growth remains firm with 3Q GDP revised higher today to just under 3% and with 4Q GDP still tracking a 4%+ handle,” he added. “Nonetheless, the markets did like the sound of smaller rate hikes instead.”

Powell, however, warned that despite some promising developments, there is still a long way to go in restoring price stability and that the Fed is “acutely aware” that high inflation is imposing significant hardship, straining budgets and shrinking what paychecks will buy.

“Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all,” he said.

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David Russell, VP of Market Intelligence at TradeStation Group, said that Powell needs to keep “talking tough,” but he gave Wall Street reason for hope.

“Everyone knows rate hikes take time to operate and we’re seeing their effects as the labor market cools. We’ve seen progress in CPI [Consumer Price Index] and even Powell expects more downward pressure as goods prices fall,” Russell said. ” Powell confirmed what the market already knew and set the stage for some adjustments to the projections next month. This could let investors view the glass as half full into the year-end.”

Indeed, markets reacted positively to Powell’s speech and CNBC reported that the Dow Jones Industrial Average was up 364 points, or 1.1%, while the Nasdaq Composite jumped 3.1% and the S&P 500 added 1.4%.

Several market experts echoed the sentiment. Jeffrey Rosenkranz, portfolio manager, Shelton Capital Management, said that by acknowledging the risk of waiting too long in moderating rate increases, Powell gave a more balanced view and a nod to risk management.

“Aside from clearly signaling a 50 bps rate increase in December, he is providing a roadmap to moderating the pace of future increases and allowing the economic data to slow rather than running the risk of over-tightening. Risk markets are cheering — at least for now,” he added.

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Powell concluded his speech saying, “history cautions strongly against prematurely loosening policy. We will stay the course until the job is done.” The next Federal Open Committee Meeting (FOMC) will take place December 13-14.

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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