Powell: Rate hikes may slow, but inflation fight hardly over
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. Yet he also made clear that the Fed isn’t even close to declaring victory in its fight to curb an inflation rate that is near four-decade highs and has shown few signs of ebbing.
When the Fed ended its latest policy meeting Wednesday, it announced that it was pumping up its benchmark rate by a substantial three-quarters of a point for a fourth straight time. Its key rate now stands in a range of 3.75% to 4%, the highest in 15 years.
It was the central bank’s sixth rate hike this year — a streak that has made mortgages and other consumer and business loans increasingly expensive and heightened the risk of a recession.
The statement the Fed issued suggested that it would begin to take a more deliberate approach to rate hikes, likely leading to smaller increases in borrowing costs. In doing so, it would consider that rate hikes take time to feed into the economy and achieve their goal of slowing inflation.
The financial markets initially cheered the notion that the Fed might soon decide to slow its hikes, with stock and bond prices surging higher.
Yet as his news conference got under way, Powell struck a harder line. He stressed that the Fed’s policymakers have seen little progress in their efforts to control inflation and would likely have to send rates even higher than they thought they would at their last meeting in September.
“We still have some ways to go,” he said. “Incoming data since our last meeting suggests” that the officials might have to raise rates higher than the 4.6% they forecast in September.
The Fed chair pointedly emphasized that it would be “very premature” to even think about halting the rate hikes. Inflation pressures, he said, remain far too high.
The abrupt shift in tone gave the financial markets whiplash. Stocks sharply reversed their gains and tumbled into the close of trading. The Dow Jones Industrial Average ended the day down over 500 points, or about 1.5%.
“I think he accomplished his goal” of striking hawkish and dovish notes, said Vince Reinhart, chief economist at Dreyfus and Mellon. (“Hawks” generally prefer higher rates to fight inflation, while “doves” often lean more toward lower rates to support hiring.) “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 implicitly addressed those fears at his news conference. He kept the door open to downshifting to a half-point hike when the Fed next meets in December. The central bank could then step down even further to a quarter-point increase — a more typically sized rate hike — early next year.
“At some point,” he said, “it will become appropriate to slow the pace of increases. So that time is coming, and it may come as soon as the next meeting or the one 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.