On Friday (December 1st) local time, Federal Reserve Chairman Powell stated that policymakers will proceed cautiously with future monetary policy decisions. He dismissed speculation that the Fed would cut interest rates in the first half of next year and kept open the option for further rate hikes.
The current federal funds rate is 5.25%-5.5%, the highest level in 22 years. The Fed began its most aggressive rate hike cycle in decades last March and has raised rates a total of 11 times so far.
The Fed will hold its final interest rate meeting of the year on December 12th-13th, and it is widely expected that they will maintain rates unchanged for three consecutive times. Wall Street believes that the Fed’s current rate hike cycle has ended, and some optimistically anticipate a rate cut in the first half of next year, which supported a significant increase in US stock market in November.
Dismissing market speculation about interest rate cuts
However, Powell refuted market speculation about interest rate cuts during his speech at Spelman College in Atlanta on Friday. He said, “It is premature to conclude either that we have reached our destination or to project what path we should take.”
Powell added, “If conditions warrant more tightening, we are prepared to do so.” However, he also pointed out that monetary policy has entered into restrictive territory.
Powell said: “Having gone this far this fast…the FOMC [Federal Open Market Committee] now feels it can be patient as it assesses whether adjustments to policy are needed.” He emphasized balancing risks between insufficient tightening and excessive tightening after such rapid progress.
For a long time, the Fed has been trying to strike a balance between excessive interest hikes leading to economic recession and insufficient hikes unable to quell inflation.
Proceeding cautiously in the future
Powell pointed out that current inflation levels remain well above their target of 2%. Citing data, he stated that the annualized growth rate of core inflation over the past six months was 2.5%. Although recent low inflation data is encouraging, sustaining progress towards the target level of 2% is necessary.
Powell said: “Inflation remains above our target but appears to be moving closer to that goal…So we believe our current policy stance is appropriate now; we will carefully monitor incoming data and let it inform our understanding of what adjustments, if any, may be needed.”
He also mentioned that the impact of monetary policy on economic conditions lags behind and the full effects of Fed rate hikes may not have fully materialized yet.
Regarding future economic prospects, Powell said: “My colleagues and I expect that as some of these headwinds wane – including those related to COVID-19 – and with strong underlying momentum in spending and with accommodative financial conditions…the economy will continue to expand at a healthy pace next year.”
The market interpreted Powell’s speech as dovish
After Powell’s speech, US stock markets rose while Treasury yields dropped significantly.
Jeffrey Roach, Chief Economist at LPL Financial, stated: “The market sees today’s comments as an alignment toward dovishness.”
Peter Cardillo, Chief Market Analyst at Spartan Capital Securities commented: “(Powell) used the word ‘balance,’ sending a message that they won’t change their wording but things are going in their desired direction. They won’t hike rates again. They’re done hiking rates; this is how the market sees it.”