Fed Chairman Powell calls talk of interest rate cuts “premature” and says more hikes could occur

Federal Reserve Chairman Jerome Powell on Friday pushed back on market expectations of big future interest rate cuts, calling it too early to declare victory over inflation.

Despite a series of recent positive indicators regarding prices, the central bank chief said the Federal Open Market Committee plans to “keep policy restrained” until policymakers are convinced that inflation is firmly heading toward 2%.

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to predict when the policy will be eased,” Powell said in prepared remarks to an audience at Spelman College in Atlanta. “We stand ready to tighten the policy further if it becomes appropriate to do so.”

Expectations that the Fed is done raising interest rates and will move to an accommodative stance in 2024 helped fuel a strong rally on Wall Street that sent the Dow Jones Industrial Average rising more than 8% over the past month to a new high in 2023.

The Commerce Department’s report on Thursday showed that personal consumption expenditures prices, the Fed’s preferred measure of inflation, rose 3% from a year ago, but 3.5% on an underlying basis that excludes volatile food and energy prices. Recent sharp declines in energy prices have been responsible for much of the decline in inflation.

Powell said current levels were still “well above” the central bank’s target. Noting that core inflation has averaged 2.5% over the past six months, Powell said: “While the lower inflation readings in the past few months are welcome, this progress must continue if we are to reach our 2% target.”

After inflation reached its highest level since the early 1980s, the Federal Reserve issued a series of 11 interest rate increases, raising the interest rate to its highest levels in 22 years at a target range of 5.25% to 5.5%. The Federal Open Market Committee (FOMC) at its last two meetings has held interest rates steady, and several officials have indicated that they believe the federal funds rate is probably at or near where it should be.

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

“The strong actions we have taken have pushed our interest rate into restricted territory, meaning tight monetary policy is putting downward pressure on economic activity and inflation,” Powell said. “Monetary policy is believed to be affecting economic conditions with a lag, and it is likely that the full effects of our tightening have not yet been felt.”

Friday morning market prices indicated that the Fed has already raised interest rates and could begin cutting as soon as March 2024, According to CME Group. Furthermore, futures point to cuts totaling 1.25 percentage points by the end of the year, equivalent to cuts of five-quarters of a percentage point.

However, neither Powell nor any of his fellow officials have given any indication that they are considering cuts, with the president committed to relying on data to make future decisions rather than any predetermined path.

Powell said: “We make decisions one meeting after another, based on the totality of incoming data and its effects on the outlook for economic activity and inflation, as well as the balance of risks.”

Speaking about the economic data, Powell described the labor market as “very strong,” by saying that the decline in the pace of job creation is helping to restore supply and demand to what it was. He also noted that easing supply chain pressures had helped moderate inflation, and said the risks of raising interest rates too much or too little had “become more balanced.” As the Fed raised interest rates, Powell stressed the importance of being aggressive.