Jay Powell tried to dampen investor expectations the Federal Reserve will cut interest rates any time soon in a hawkish speech that signalled the US central bank has a long way to go in its fight against inflation.
“I will simply say that we have more ground to cover,” the Fed chair said in prepared remarks to be delivered at the Brookings Institution on Wednesday. “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
Powell’s intervention comes after a sustained market rally, with the S&P 500 on course for its first stretch of back-to-back monthly gains since summer last year, and an easing of financial conditions as investors wager that the Fed is losing the stomach for its fight against higher prices.
Investors were buoyed by the October inflation report, published earlier this month, which undershot expectations for the first time in months.
But Powell on Wednesday cautioned against reading too much into one month of data, instead stressing it will take “substantially more evidence to give comfort that inflation is actually declining”.
He warned that while inflation forecasts from the Fed and others pointed to a “significant decline over the next year”, the central bank had been repeatedly wrongfooted by incorrect projections in the past.
“The truth is that the path ahead for inflation remains highly uncertain,” he said, noting the Fed had not yet seen “clear progress” of slower inflation.
In a wide-ranging speech about the outlook for monetary policy, Powell said that in order to get inflation back down to the Fed’s 2 per cent target, the labour market must become substantially softer and there would need to be a “sustained period of below-trend growth”.
He said that job gains still remain far too high, at about 290,000 positions per month over the past three months. And wage growth remains well above than the figure that would correspond to inflation falling back to target.
Powell’s comments come at a critical juncture for the Fed, which is preparing to slow the pace of its interest rate increases after a string of large 0.75 percentage point rises at its four previous meetings.
The chair said the Fed could ease off the pace of rate rises as soon as its next meeting in December, but that the “timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level”.
Powell reiterated that the end-point of the tightening cycle would probably need to be higher than forecasted in projections released in September, which suggested most officials anticipate a so-called terminal rate of 4.6 per cent.
Fed officials are still unanimous in their view that inflation remains too high and that they will need to tighten policy further, but divisions have started to emerge over how much more restraint to apply to the economy next year given early indications that higher borrowing costs are starting to affect consumers and businesses.