Federal Reserve Chair Jerome Powell Addresses Inflation, Interest Rates in Speech

In a speech delivered at Spelman College in Atlanta on Friday, Federal Reserve Chair Jerome Powell addressed the issue of aggressive interest rate cuts and the current state of inflation. Powell pushed back on market expectations for severe interest rate cuts, asserting that it is too early to claim victory over inflation.

Too Early to Declare Victory Over Inflation

Despite recent positive indicators regarding prices, Powell announced that the Federal Open Market Committee (FOMC) plans on keeping policies restrictive until they are certain that inflation is firmly heading back to the 2% target. Powell expressed his belief that it would be premature to conclude that they have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.

Market Reaction

Following Powell’s remarks, major averages on Wall Street showed little initial reaction, with markets showing mixed results and Treasury yields lower. Expectations that the Fed is done raising rates and will move to an easing posture in 2024 have contributed to a strong rally on Wall Street.

Strong Actions to Combat Inflation

After inflation reached its highest level since the early 1980s, the Fed implemented a series of 11 interest rate hikes, taking its policy rate to the highest in 22 years at a target range between 5.25%-5.5%. The FOMC has maintained rates at level over its past two meetings. Powell emphasized that the strong actions they have taken have moved their policy rate well into restrictive territory, and the full effects of the tightening have likely not yet been felt.

Traders Expect Cuts

Market pricing indicates that the Fed may start cutting rates as soon as March 2024, with futures pointing to the equivalent of five quarter percentage point reductions by the end of the year. However, Powell and his fellow officials have not provided any indication that they are thinking about cuts, and the chair has emphasized that decisions are made meeting by meeting, based on incoming data and their implications for economic activity and inflation, and the balance of risks.

Labor Market

Powell also addressed the current state of the labor market, characterizing it as “very strong.” Despite this, he mentioned that a reduced pace of job creation is helping to bring supply and demand back in line. He made it clear that the FOMC is moving forward carefully, as the risks of under- and over-tightening are becoming more balanced.

The next FOMC meeting is scheduled for December 12-13.