Federal Reserve Chair Jerome Powell signaled that the central bank will slow its pace of rate hikes (opens in new tab) next month, but stressed that borrowing costs will remain high for the foreseeable future in a bid to halt the worst inflation (opens in new tab) in four decades.
In a speech delivered at the Brookings Institution in Washington, D.C., on Wednesday, Jerome Powell acknowledged that monetary policy affects the economy and inflation with “uncertain lags.” As such, the full effects of the Fed’s rapid series of rate hikes have yet to be felt.
“Thus, 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 (opens in new tab) down,” said Jerome Powell. “The time for moderating the pace of rate increases may come as soon as the December meeting.”
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Market participants expect the central bank to enact a rate hike of 50 basis points, or 0.5%, when it concludes its two-day meeting on Dec. 14.
Stocks rose sharply on the news, with the S&P 500 vaulting into positive territory following Jerome Powell’s remarks. The blue-chip Dow Jones Industrial Average and tech-heavy Nasdaq Composite likewise rallied on the Fed chair’s more dovish stance.
To get a sense of what market pros are making of Jerome Powell’s speech on rate hikes, below please find a selection of commentary from economists, strategists and other experts, sometimes edited for brevity.
“Despite one soft CPI print, the Chair hasn’t changed his tune since the post-meeting presser of earlier this month. A tight labor market that has shown only ‘tentative’ signs of moderation is clearly in his crosshairs. Until job growth slows more substantially and the unemployment rate (opens in new tab)kicks higher, don’t expect him to ease up on the hawkish rhetoric. As largely expected, Chair Jeome Powell ratified market expectations of a likely 50 basis point rate hike on December 14, while underscoring that rates are likely to go higher than the Fed previously thought and remain elevated for a while. Powell said the time to moderate the pace of rate hikes could come as soon as the next meeting given substantial progress in taking policy toward a ‘sufficiently restrictive’ stance and in recognition of the lagged effects of past policy moves. However, he also stuck to his recent script that the terminal policy rate is likely to go ‘somewhat higher’ than the Federal Open Market Committee (FOMC) thought in September (4.50% to 4.75% in late 2023) and may need to be held at a restrictive level ‘for some time,’ as the Fed has a long way to go to restore price stability.” – Sal Guatieri, senior economist at BMO Capital Markets”Lower growth is needed to quell inflation and to restore the balance between supply and demand. Without a doubt, the pandemic pushed supply and demand out of balance. As trade and supply chains improve, supply should have a better chance of meeting aggregate demand. The Fed will likely downshift the pace of rate hikes at the upcoming December meeting. Bottom Line: Although much of Chair Jerome Powell’s comments were benign and predictable, investors could be spooked with the Chair’s admission that ‘the path ahead for inflation remains highly uncertain.’ Overall, this speech will likely be bullish for the markets in the near term.” – Jeffrey Roach, chief economist at LPL Financial”It’s a relief to hear Jay Powell go into at least some detail regarding the key elements of inflation including the misleading ‘owners equivalent rents’ outsized impact on core CPI and offering a more realistic picture of housing inflation. While still mostly ignoring the elephant in the room regarding the role of fiscal stimulus in keeping work force participation too low to relieve wage inflation pressures, Powell did point out that Congress could pursue pro-labor policies to improve work force participation. Greenspan was effective at educating people on nuances in economic measurements and Powell certainly had a Greenspan-like moment when we went into some depth to explain how the six to twelve month lag in lease renewals falsely gives the impression that housing costs are still rising rapidly. He further explained how by looking at new lease rates, it is apparent the housing inflation is subsiding rapidly. This greatly reduces the pressure on the Fed to continue to raise rates aggressively and finally is more consistent with the obvious reality all the rest of us are experiencing in real time. Stocks should push higher and the yield curve inversion should now lessen.” – Bryce Doty, senior vice president and senior portfolio manager at Sit Investment Associates”There has been very little discussion from FOMC voting members about the Terminal Rate, but there have been a couple of comments lately about slowing the pace of increases. Markets have jumped at the suggestion that the December meeting could bring only a 0.50% hike — a clear difference from the 0.75% trend. The problem is that markets have taken that 0.25% difference and applied it to the Terminal Rate. So here we are again talking about the difference in language. Less Hawkish language does not imply a change in policy or a ‘pivot.’ Further, there is not enough empirical data to make us believe that the Fed Funds Rate will be less than 5% right now. Keep in mind, CPI is 7.7% and PCE is 5.15% — both are a LONG way from the 2% target and data shows that we will not be under 3% CPI until late 2024-mid 2025.” – Brian Mulberry, client portfolio manager at Zacks Investment Management”Although Jerome Powell echoed many of the comments he made at the November 2 press conference regarding smaller rate hikes as the Fed navigates its way toward price stability, the 10-Year Treasury edged lower, while the policy sensitive 2-Year Treasury yield similarly inched slightly lower. The equity markets, across the board, climbed higher as Powell assured markets that although the Fed is dealing with many uncertainties, the Fed will continue to raise rates but with a step down approach, with smaller rate hikes so they can monitor the lagged effect of the cumulative hikes working their way through the broader economy.” – Quincy Krosby, chief global strategist at LPL Financial”Powell confirmed that the Fed is about to pivot and that got investors excited today. Despite his best Fed doublespeak, Wall Street got excited when Chairman Powell talked about inflation declining. Fed Chairman Jerome Powell’s speech at the Brookings Institution on Wednesday started off hawkish when he said. “I will simply say that we have more ground to cover.” However, Powell also said that inflation forecasts from the Fed pointed to a ‘significant decline over the next year.'” – Louis Navellier, chairman and founder of Navellier & Associates”Powell says ‘moderate’ but investors hear ‘pivot.'” – David Rosenberg, founder and president of Rosenberg Research