Interest rate hikes should be lower in December, says US central bank governor

The Federal Reserve (Fed, the central bank of the United States) may reduce the pace of its aggressive interest rate hikes as early as December, Fed Chair Jerome Powell said on Wednesday (30) at an economic forum.

“The time to moderate the pace of rate hikes could come as early as the December meeting,” he said in remarks at the Hutchins Center on Fiscal and Monetary Policy, his last public appearance before the central bank enters a pause period leading up to the December 13-14 policy-making meeting.

“Despite some promising developments, we have a long way to go,” Powell said, noting that the Fed “has not seen clear progress” in inflation – the highest in decades – plaguing the economy.

Investors are watching for any indication that the Fed might slow or even stop its schedule of rate hikes – the much-talked-about “pivot” that would release the brakes the central bank has put on the economy.

But Fed officials have ramped up their rhetoric in recent weeks to spread the message that there is much more work to be done and will press ahead with rate hikes – albeit smaller ones – until the current bout of rising inflation shows signs of abating.

St Louis Federal Reserve President James Bullard warned this week during a virtual event that financial markets are underestimating the risk of continued Fed aggressiveness, as New York Fed President John Williams said. to the Economics Club of New York that inflation remains the “#1 problem around the world”, citing underlying inflation in the services sector as “the most challenging aspect” of the battle.

The Fed has raised its benchmark interest rate six times this year in a bid to discourage borrowing, cool the economy and reduce historically high inflation, which peaked at 9.1% in the summer and has since slowed to 7.7%, according to the latest Consumer Price Index (CPI)

However, despite this aggressive action – which would normally hit the job market as companies reduce their spending – the employment landscape has so far remained resilient.

After millions of people were left unemployed at the start of the pandemic, the economy has recovered all the lost jobs, adding hundreds of thousands of jobs each month and maintaining an unemployment rate close to a half-century low.

While that’s good news for workers, the tight job market puts the Fed in a tricky position, as understaffing means workers can essentially set their price, adding to inflationary pressures.

The latest Employment Vacancies and Labor Turnover Survey showed on Wednesday that there were nearly 1.7 jobs available to every job seeker in October.

quick fix

The Fed is stuck dealing with a problem of supply-side inflation for which it has only crude tools. Demand for goods surged in the United States last summer as consumers began to emerge from the darkest days of lockdowns and layoffs – but the global supply chain took longer to recover, leading to bottlenecks, merchandise shortages and price increases. .

Resisting calls to address runaway inflation and dismissing it as “transitional,” the Fed has kept its historically low interest rates, unwilling to risk short-circuiting any spurt of economic growth. But as demand continued to grow, it became clear that inflation had quickly become the central bank’s main concern.

The Fed embarked on a rapid correction course in March, “early loading” the economy with high interest rates, first raising its benchmark interest rate by its usual quarter of a point, then by half a point, and then launching four massive three – quarter-point walks in a row.

However, even this unprecedented action, unheard of in the modern central bank era, still failed to cause a significant reduction in US inflation. And the rate hikes may be doing more harm than good.

Critics, including Senators Elizabeth Warren and Sherrod Brown, have warned that the Fed’s “extreme” actions could “pull millions of Americans out of work.”

Furthermore, the housing market has already slowed dramatically, with mortgage rates recently reaching 7% and home sales falling for nine straight months.

Because rate hikes can take months, even years, to flow through the economy, the Fed now appears to be adopting a “lower and slower” model of smaller rate hikes over a longer period. Ideally, this approach will lead to the proverbial “soft landing”, controlling inflation and avoiding recession or significant layoffs.