– Powell: Policy ‘Restrictive’ But Must Be Confident It’s ‘Sufficiently Restrictive’
– Powell: FOMC Not Considering Rate Cuts Or Halting Quantitative Tightening
– Powell: ‘Proceed Carefully’ In Deciding How Much More Higher Rates May Go
– Powell Declines To Say Bond Yield Spike Substitutes For Fed Rate Hikes
By Steven K. Beckner
(MaceNews) – The Federal Reserve left short-term interest rates unchanged Wednesday, but left the door wide open for another rate hike before year’s end, in keeping with Fed officials’ September projections.
In an asymmetrical policy statement announcing its decision to hold the federal funds rate steady, the Fed’s rate-setting Federal Open Market Committee again leaned toward further monetary tightening by speaking of the conditions for “determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time.”
Reinforcing the tilt toward further tightening, Chairman Jerome Powell called the current policy stance “restrictive,” but said the FOMC must be “confident” it is “sufficiently restrictive” to achieve 2% inflation. And he warned continued strength in economic activity “could warrant further tightening of monetary policy.”
Powell virtually ruled out rate cuts or trimming “quantitative tightening” anytime soon.
He acknowledged the tightening of financial conditions, in particular the spike in bond yields, and said the FOMC will take that into account, but shied way from saying that would substitute for further rate hikes, as some officials have openly contended.
After raising the funds rate 11 times by a cumulative 525 basis points, the FOMC skipped raising its policy rate for a second straight meeting – the first time it has done so since leaving the zero lower bound in March 2022. The unanimous vote left the funds rate in a target range of 5.25% to 5.50%.
Explaining the decision to stand pat, the FOMC made few significant changes to its policy statement. Instead of calling economic growth “solid,” as in September, it cited its “strong pace in the third quarter.” Instead of saying job gains had “slowed,” it said they had “moderated.”
Echoing what he said in an Oct. 19 speech to the Economic Club of New York, Powell warned that “additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
Some might say those conditions already prevail. Following Powell’s comment, the Commerce Department estimated that real GDP grew at an annualized 4.9% in the third quarter – much stronger than the Fed’s longer run or “trend” growth rate. Labor markets “remain tight,” as Powell said.
Inflation remains far above target, as he also observed. The price index for personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, accelerated in September, rising 3.4% year over year overall and 3.7% on a core basis. “Supercore” inflation ran 4.3%.
Meanwhile, long-term interest rates have spiked, weighing on housing and other interest-sensitive activity. Last week, the 10-year Treasury note yield exceeded 5% for the first time in 16 years, before retreating near 4.85% as the FOMC convened. A number of Fed officials have said this “tightening of financial conditions” could substitute for monetary tightening, although opinions differ on what message rising bond yields are sending the central bank.
The debate lately has basically been over whether rising longer term yields reflect belief that strong growth will sustain above-target inflation and force the Fed to raise short-term rates or whether the yield spike just reflects rising term premiums, i.e., the theoretical additional amount of interest investors demand for holding long-dated securities.
As Dallas Federal Reserve Bank President Lorie Logan framed it, “If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed funds rate. However, to the extent that strength in the economy is behind the increase in long-term interest rates, the FOMC may need to do more.”
The FOMC statement made no reference to sharply higher bond yields, but merely repeated that “tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.”
Addressing the issue in his post-FOMC press conference, Powell noted that “financial conditions have tightened significantly in recent months, driven by higher longer-term bond yields, among other factors. Because persistent changes in financial conditions can have implications for the path of monetary policy, we monitor financial developments closely.”
Pressed on whether higher bond yields might substitute for Fed rate hikes, Powell was much less emphatic than some of his colleagues, suggesting that the tightening of financial conditions hasn’t lasted long enough to significantly impact monetary policy.
“The tighter conditions would need to be persistent,” he said, “and that is something that remains to be seen. But that is critical. You know, things are fluctuating back-and-forth. That is not what we are looking for. With financial conditions we are looking for persistent changes that are material.”
“The second thing is that the longer-term rates that have moved up … can’t simply be a reflection of expected policy moves from us that we would then, if we didn’t follow through on them, then the rates would come back down.”
“I would say that it does not appear that an expectation of higher near-term policy rates is causing the increase in longer-term rates,” he added.
Several times in his news conference, Powell reiterated that the FOMC can and will be “careful” in deciding on whether rates need to go higher.
“In light of the uncertainties and risks, and how far we have come, the Committee is proceeding carefully,” he said. “We will continue to make our decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation as well as the balance of risks.”
“In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,’ he continued, echoing the statement.
Powell said “the stance of policy is restrictive, meaning that tight policy is putting downward pressure on economic activity and inflation, and the full effects of our tightening have yet to be felt.”
The issue for the FOMC going forward, he said, will be determining whether policy is restrictive enough.
“We are committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation sustainably down to 2% over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective,” he said.
Powell virtually ruled out rate cuts in the foreseeable future, as he continued to stress the need for the FOMC to become “confident” that monetary policy is “sufficiently restrictive.”
“So, the fact is, the Committee is not thinking about rate cuts right now at all,” he said. “We are not talking about rate cuts. We are still very focused on the first question, which is, have we achieved a stance of monetary policy that is sufficiently restrictive to bring inflation down to 3% over time sustainably? That is the question we are focusing on.”
“The next question … will be: for how long will we remain restrictive?” he continued. “We said … we will keep policy restrictive until we are confident that inflation is on a sustainable path down to 2%. That will be the next question.”
“But honestly right now, we are tightly focused on the first question,” he went on. “The question of rate cuts doesn’t come up, because I think … it is so important to get that first question … as close to right as you can.”
Powell also ruled out any near-term change in its so-called “quantitative tightening” policy of balance sheet reduction, a tandem tightening policy that has seen the Fed reduce its securities holdings by more than $1 trillion over the past year and a half.
“The Committee is not considering changing the pace of the Balance Sheet runoffs,” he asserted. “That is not something we are considering.”
“I know there are many candidate explanations for why rates have been going up, and QT is certainly on that list, although it could be playing a small effect,” he elaborated. “At 3.3 trillion (dollars) in reserves, I think it is hard to make a case that reserves are even close to scarce so that is not something we are looking at right now.”
The Fed chief continually stressed the Fed’s commitment to fighting inflation, and while he welcomed the moderation of both price and wage increases, he made clear he is not satisfied with the progress made so far.
“Inflation has moderated since the middle of last year and readings over the summer were quite favorable,” he said. “But a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.
Powell added that “the process of getting inflation sustainably down to 2% has a long way to go.”
After skipping rate hikes at two straight meetings, some have wondered whether the FOMC might extend its “pause” into next year, and a reporter asked Powell whether such an extended pause would make it difficult for the FOMC to resume raising rates if it felt the need to do so.
Powell rejected that assumption as well: “I would say the idea it would be difficult to raise again after stopping for a meeting or two is just not right. The Committee will always do what it thinks is (right)….
Listing all the factors the FOMC will be considering at future meetings, he said, “we will look at all those things as we reach a judgment, whether we need to further tighten policy. If we do reach that judgment, we will tighten policy.”
But in a concession to a less aggressive approach to inflation fighting, Powell said, “the risks are getting more balanced. The risk of doing too much versus too little are getting closer to balanced.”
Noting that the Fed has already slowed the pace of tightening and is “proceeding carefully,” Powell said uncertainty about monetary policy lags is “one of the reasons why we have slowed the process down this year, was to give monetary policy time to get into the economy, and it takes time.”
“Slowing down is giving us, I think, a better sense of how much more we need to do. if we need to do more.”
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