rate hikes and inflation

Powell: More Rate Hikes Possible Despite Inflation Dip

In a cautionary address at Spelman College in Atlanta, Federal Reserve Chair Jerome Powell warned investors against premature assumptions that the central bank has concluded its rate hikes emphasizing that the Federal Reserve needs more concrete evidence of a return to the target 2% inflation rate before considering any policy shifts.

In prepared remarks delivered on Friday, Powell acknowledged that the current monetary policy is “well into restrictive territory.” Despite this, he left the door open for further rate hikes, stating, “We are prepared to tighten policy further if it becomes appropriate to do so.”

The Federal Reserve Chair’s remarks came in the wake of a recent update on the core Personal Consumption Expenditures (PCE) index, the central bank’s preferred measure of inflation. The data revealed a gradual decline in inflation, with the core PCE registering 3.5% in October, down from 3.7% in September and continuing a downward trend from the peak of 4.3% in June.

Investors had speculated that the Fed might be concluding its hiking cycle, particularly after the release of the core PCE numbers. Some had even bet on potential rate cuts in the first half of 2024, with billionaire investor Bill Ackman suggesting an earlier-than-expected cut in the first quarter.

However, Powell’s cautious stance countered these expectations. He stressed that while recent lower inflation readings were positive, sustained progress was necessary to achieve the 2% inflation objective.

During his speech, Powell revealed that core inflation had averaged 2.5% annually over the six months ending in October. He emphasized that sustained progress was crucial for reaching the inflation target.

Powell and his colleagues foresee a slowdown in growth and consumer spending over the coming year as the effects of the pandemic diminish and higher rates take their toll. Powell hinted that the full impact of the aggressive rate hikes might not have materialized yet.

The Federal Open Market Committee’s decision to maintain interest rates in the range of 5.25% to 5.50%, a 22-year high, during its last meeting underscored the cautious approach. The committee is set to convene for its final meeting of the year on December 12-13.

Powell reiterated the unusual uncertainty surrounding the economic outlook and emphasized the Fed’s careful and incremental decision-making process. This suggests that the central bank is likely to keep interest rates steady at the upcoming December meeting without declaring a definitive victory in the battle against inflation.

This sentiment was echoed by other Fed officials, including New York Fed President John Williams, who stated that inflation remains “too high,” and the Fed’s work is “not nearly done.” San Francisco Fed President Mary Daly, in an interview, emphasized that while rates are in a “very good place,” it is premature to discuss the end of hikes or the initiation of cuts.

In conclusion, as the Federal Reserve maintains a watchful stance amid ongoing economic uncertainties, the possibility of further rate hikes remains a key consideration, intricately tied to the fluctuating landscape of inflation. The collective message from Federal Reserve officials underscores a commitment to a patient and data-driven approach, reflecting their determination to navigate the uncertainties of the current economic landscape.
Source: Yahoo Finance

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