- Powell Says Slower Pace of Hikes Could Come in Next Two Meetings
- But Powell Says Rates May Have To Go Higher Than Projected in September
- And Powell Says It’s ‘Very Premature’ To Talk About Pausing Rate Hikes
- Also Warns Against ‘Mistake’ Of Loosening Monetary Policy ‘Prematurely’
- FOMC Says Funds Rate Needs To Get ‘Sufficiently Restrictive’ To Curb Inflation
By Steven K. Beckner
(MaceNews) – For their fourth straight meeting, Federal Reserve policymakers raised short-term interest rates by 75 basis points Wednesday and let it be known further rates hikes are likely in coming months.
But there were no clear indications how much more the Fed is likely to raise the federal funds rate or how rapidly. Although Chairman Jerome Powell suggested the pace of rate hikes could slow at coming meetings, he also appeared to raise the bar for how high the federal funds rate may need to go.
The Fed’s policymaking Federal Open Market Committee reiterated that “ongoing increases” will be needed and said it wants to get to a “sufficiently restrictive” policy stance. It added it will be considering the ‘cumulative,” “lag(ed)” economic and financial effects of its funds rate hikes since March.
Powell said the pace of rate hikes could slow at the December or the January FOMC meeting, but at the same time said the Fed has “a ways to go” before it reaches a “sufficiently restrictive” policy stance and said rates will likely have to go higher than projected in September.
What’s more, Powell, speaking to reporters after the rate announcement, said it’s “very premature to think about pausing” rate hikes. He repeated past warnings about not tightening policy enough to restrain inflation and to keep it from becoming “entrenched.”
The FOMC unanimously raised the federal funds rate by 75 basis points to a target range of 3.75 to 4.0% (a median of 3.9%). Cumulatively, the FOMC has now raised the funds rate by 375 basis points since March, when it stopped holding it near zero.
The latest rate hike takes the funds rate within 50 basis points of the 4.4% year-end median funds rate which Fed officials projected in September.
The FOMC left in place its balance sheet reduction strategy, enunciated in May, by which it is now allowing its portfolio of Treasury securities and agency mortgage backed securities to shrink by a combined $95 billion per month.
Since FOMC participants won’t be revising their economic and funds rate projections again until the Dec. 13-14 meeting, the only indications of the future rate path this time had to come from the FOMC policy statement and from Powell’s post-FOMC press conference.
The statement provided few clues about the pace of further rate hikes or the ultimate destination of the funds rate. As it has been saying since it began firming monetary policy on March 16, the FOMC reiterated it “anticipates that ongoing increases in the target range will be appropriate.”
New language was appended that further increases would be undertaken “in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”
Beyond that, the statement was vague, although it did include new language about the factors that will influence the future rate path: “In determining the pace of future increases in the target range, 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.”
Powell did not add a lot of clarity. Asked repeatedly about plans for slowing and eventually halting rate hikes, he avoided giving precise signals. As he’s done before, he said that “at some point it will become appropriate to slow the pace of increases,” but did not say when that will be.
The Fed chief did say “that time is coming, and it may come as soon as the next meeting (Dec. 13-14) or the one after that (Jan. 31-Feb. 1).”
But, he said, “No decision has been made. It is likely we’ll have a discussion about this at the next meeting — a discussion.”
“To be clear, let me say again,” he continued, “the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive which will be our principle focus.”
After repeating that a slower pace of rate hikes will “become appropriate” “at some point,” he said, “There is significant uncertainty around that level of interest rates.
Powell strongly suggested the funds rate will have to go higher than projected in the FOMC’s Sept. 22 Summary of Economic Projections – 4.4% by the end of 2022 and 4.6% by the end of 2023. “We still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” he said.
While suggesting a slower pace of rate hikes could come as soon as next month, Powell took pains to dampen speculation about a halt or “pause” in rate hikes, asserting, “Let me say this: it is very premature to be thinking about pausing.”
“When they (Fed watchers) hear ‘lags,’ they think about a pause,” Powell elaborated, but “It’s very premature in my view to be thinking about or talking about pausing our rate hike.”
“We have a ways to go,” he repeated. “We need ongoing rate hikes to get to that level of restrictive. We don’t know where that exactly is. We have a sense.”
Powell noted FOMC participants will be revising their funds rate projections at the December meeting and strongly suggested they will be revised higher.
In the same vein, Powell said that pausing rate hikes is “not something that we’re thinking about. That’s really not a conversation to be had now. We have a ways to go.”
If a pause would be “premature,” an easing of monetary policy would be even more so, in Powell’s view. “The historical record cautions strongly from loosening policy. We will stay the course until the job is done.”
“From a risk management standpoint we want to make sure that we don’t make the mistake of either failing to tighten enough or loosening policy too soon,” Powell also said.
He suggested that it would be less perilous if the Fed were to make the opposite mistake of tightening too much, because in that event, “then we have the ability with our tools, which are powerful, to support economic activity strongly if that’s necessary.”
But “if you make a mistake in the other direction and you let this (high inflation) drag on, then it’s a year or two down the road and you’re realizing inflation behaving the way it can, you’re realizing you didn’t actually get it and have to go back in. It has become entrenched in people’s thinking.”
After 375 basis points of increases, the funds rate stands 140 basis points above the FOMC’s 2.5% estimate of the “longer run” funds rate – often called the “neutral” rate. However, in real terms, the funds rate remains deeply negative relative to inflation, particularly if measured against the Consumer Price Index, which rose 8.2% from a year earlier in September. Even relative to the Fed’s preferred inflation gauge, the price index for personal consumption expenditures (PCE), which rose 6.2% from a year ago in September, or the core PCE, which rose 5.1%, the real funds rate is negative.
Asked whether the funds rate needs to go above the rate of inflation, Powell hedged.
“So this is the question of does the policy rate need to get above the inflation rate,” he replied. “I would say there are a range of views on it. That’s the classic Taylor principle view. I think you would look at a more forward looking measure of inflation to look at that.”
“But I think the answer is we’ll want to get the policy rate to a level where it is — where the real interest rate is positive,’ he continued. “We will want to do that. I do not think of it as a single and only touchstone, though.”
Powell expressed a high degree of dissatisfaction with the lack of progress thus far in reducing inflation.
“We haven’t seen inflation coming down,” he said. “The implication of inflation not coming down — what we would expect by now to have seen is that really as the supply side problems had resolved themselves, we would have expected goods inflation to come down by now, long since by now. It really hasn’t.”
“Actually it has come down, but not to the extent we had hoped,” he continued. “At the same time now you see services inflation, core services inflation moving up. I think the inflation picture has become more and more challenging over the course of this year, without question.”
The FOMC met against what some might call a stagflationary backdrop. Ahead of the meeting, the Labor Department reported its Employment Cost Index rose 5% in the third quarter. The Commerce Department’s PCE price index was reported up 6.2% from a year ago in September.
Meanwhile, although overall consumer spending rebounded by 0.6% last month, indicators on interest-sensitive sectors like housing were quite soft. With the 30-year fixed mortgage rate soaring to a 20-year high above 7%, pending home sales dropped a more-than-expected 31% in September from a year ago.
And there were other signs of weakness. The Institute for Supply Management’s October manufacturing index fell to a barely positive 50.2 – lowest reading since May 2020, as new orders contracted further. That followed a Dallas Federal Reserve Bank survey revealing slowing in 11th district manufacturing. It said “growth in Texas factory activity continued in October, but is showing signs of decelerating.” Although production grew, “new orders are declining, and outlooks worsened further.”
Although real GDP bounced back to grow 2.6% in the third quarter after two contractionary quarters, according to the Commerce Department’s advance estimate, most of the rebound was attributed to a narrowing of the trade deficit.
Despite the economy’s cooling, the labor market remained tighter than the Fed would like with unemployment at 3.6%, as indicated by the Labor Department’s report that job openings reversed an August decline in September.
The Beige Book survey of economic conditions prepared for review at this meeting found that half of the 12 Fed districts reported either “flat” or “declin(ing)” economic activity, “with slowing or weak demand attributed to higher interest rates, inflation, and supply disruptions.”
“Retail spending was relatively flat, reflecting lower discretionary spending, and auto dealers noted sustained sluggishness in sales stemming from limited inventories, high vehicle prices, and rising interest rates,” the Beige Book added.
The other notable development in the weeks leading up to the meeting was the surprisingly strong stock market rally. Spurred in good part by hopes for a moderation of monetary tightening, fueled by warnings against “over-tightening” from some officials. This loosening of financial conditions works against the Fed’s efforts to curb demand and inflation. The Fed has been consciously trying to tighten financial conditions for the past year.
In its characterization of economic conditions, the FOMC statement repeated what it said in September: “Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
In raising the funds rate by 75 basis points, the Fed lifted other administered rates commensurately. The Board of Governors, the core of the FOMC, lifted the rate paid on reserve balances the same amount to 3.90%. The offering rate on overnight reverse repurchase agreements was raised to 3.80%. The Board raised the primary credit or “discount” rate 75 basis points to 4.0%.
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Contact this reporter: steve@macenews.com
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