On Friday, Federal Reserve Chairman Jerome Powell tempered market expectations for aggressive interest rate cuts, emphasizing that it is premature to declare triumph over inflation.
Wall Street stirs with anticipation of rate cuts as hopes are rising for a gentle economic slowdown. Economists expect the Federal Reserve to cut rates very soon in 2024.
Last week also saw a change in policymakers’ approach. Fed officials have softened their stance by sharing their view of maintaining interest rates in the December meeting.
Talks of Rate Cuts Would Be Premature
Despite these recent positive signs in market and pricing, the central bank leader stated that the Federal Open Market Committee intends to maintain a “restrictive” policy until policymakers are confident that inflation is firmly returning to 2%.
In prepared remarks at Spelman College in Atlanta, Powell cautioned against prematurely asserting a satisfactory restrictive stance. He states, “It would be premature to conclude with confidence.” He added the Fed is ready to tighten policy further if deemed appropriate.
However, Powell acknowledged that policy is “well into restrictive territory” and highlighted that the balance of risks between taking excessive measures or insufficient action on inflation is currently closely balanced.
In 2024, economists anticipate a further slowdown in inflation, but some suggest it might not reach the Federal Reserve’s 2% target until the subsequent year.
Powell highlighted that the present levels of inflation remain “well above” the central bank’s target, emphasizing that core inflation has maintained a 2.5% annual rate in the last six months.
He stressed the importance of sustained progress, stating,
“While the recent lower inflation readings are encouraging, this trajectory must persist for us to achieve our 2 percent objective.”
Powell Remarks on the Aggressive Tightening Done So Far
Powell stated,
“Having made significant progress swiftly, the FOMC is proceeding cautiously, as the risks of both under- and over-tightening are becoming more balanced.”
He explained,
“As the pandemic’s demand- and supply-related impacts persist in unwinding, uncertainty about the economic outlook remains unusually high,”
In line with prevailing forecasts, Powell and his colleagues anticipate a deceleration in spending and output growth in the coming year.
This projection is shaped by the diminishing effects of the pandemic and reopening and fueled by the influence of a restrictive monetary policy on overall demand.
Powell’s remarks give support to the notion that the Fed might be done with hiking. That is with consideration of the series of rate increases since March 2022 that have impacted economic activity.
Impact on the Market
After Powell’s comments, markets experienced an upward shift, with significant gains on Wall Street and a notable decline in Treasury yields.
Notably, the Fed’s next meeting will be held on December 12th and 13th, which will give a clearer picture of the future.
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