Fed ‘Not Confident’ Inflation Policy Restrictive Enough: Powell

Federal Reserve Board Chairman Jerome Powell speaks during the 24th Jacques Polak Annual Research Conference on Global Interdependence at International Monetary Fund headquarters in Washington on Nov. 9, 2023. (Jim Watson/AFP via Getty Images)

Federal Reserve Chair Jerome Powell is “not confident” that the central bank has done enough to eradicate inflation from the U.S. economy, he said in a prepared speech.

Appearing before an International Monetary Fund audience on Nov. 9, Mr. Powell warned that additional work must be done to restore price stability.

“The Federal Open Market Committee is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance,” he said.

Mr. Powell said that because many of the supply-chain bottlenecks have been resolved and economic growth remains strong, he believes it will be harder to combat inflation.

“Going forward, it may be that a greater share of the progress in reducing inflation will have to come from tight monetary policy restraining the growth of aggregate demand,” he said.

He acknowledged that progress is being made in bringing inflation back down to the rate-setting committee’s 2 percent target, but he noted that officials wouldn’t hesitate to “tighten policy further.” At the same time, he added that caution and balance must be considered.

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“If it becomes appropriate to tighten policy further, we will not hesitate to do so,” said the Fed chief, who was interrupted by a group of climate change protesters. “We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening.”

Mr. Powell and his colleagues have suggested they could raise interest rates at any moment if warranted.

“We know that ongoing progress toward our 2 percent goal is not assured: Inflation has given us a few head fakes,” he told the audience.

Since the consumer price index (CPI) peaked at 9.1 percent in June of 2022, the annual inflation rate has slowed, but it continues to run at double what the Fed wants. In September, the CPI came in hotter than expected at 3.7 percent. Looking ahead to the upcoming October CPI report, the Cleveland Fed’s Nowcasting model forecasts an annual inflation print of 3.3 percent.

However, the financial markets largely believe the Fed has finished boosting rates and could start cutting next year. According to the CME FedWatch Tool, the futures market is overwhelmingly penciling in a rate pause at the December policy meeting. Investors are anticipating rate cuts beginning in June 2024.

“I believe rates will remain elevated until next summer, but just as important to consider is how large and how fast the reduction is when they start,” Lon Erickson, a portfolio manager at Thornburg Investment Management, said in a note.

Stocks and Bonds

The U.S. stock market slumped after Mr. Powell’s comments, with the leading benchmark indexes sliding by as much as 0.9 percent. The S&P 500 ended its longest winning streak in two years.

In addition to the Fed’s higher-for-longer mantra, the latest long-term duration bond auction drove some of the action. The Treasury sold $24 billion in 30-year Treasurys and garnered weaker-than-expected demand.

Treasury yields were up across the board, including the benchmark 10-year yield, which rose by about 13 basis points to 4.636 percent. The 2-year yield edged up by almost 10 basis points to above 5.03 percent, and the 30-year bond jumped by more than 11 basis points to top 4.77 percent.

“The auction performed far worse than expected as inflation worries persisted. This was perceived as a sign that inflation expectations still elevated over the long-term,” The Kobeissi Letter, a global capital markets commentary firm, wrote on X, formerly known as Twitter. “Furthermore, this seems to be yet another sign that higher for longer is the new normal. Bond markets continue to drive everything.”

In recent weeks, a chorus of Fed officials has argued that the swings in Treasury yields have helped the central bank’s tightening efforts. But one regional central bank head said he thinks the recent action in the bond market might not be a reliable indicator of how to manage policymaking.

A Warning From Richmond Fed’s Barkin

During an MNI webcast on Nov. 9, Richmond Fed President Tom Barkin said that he adopts a more “holistic” view of financial conditions.

“I don’t think long rates are quite useful as a policy variable. They can move, you know, pretty significantly over a relatively short time period,” Mr. Barkin said.

He also warned that all the Fed tightening “will eventually hit the economy harder than it has.”

“I think there is more lags to come,” the Richmond Fed chief said.

In the third quarter, the U.S. economy expanded by 4.9 percent. Early projections suggest that the fourth quarter might not emulate this growth. The Atlanta Fed Bank’s GDPNow model estimate shows about 2 percent, while the New York Fed Nowcast points to similar growth.

At the same time, various recession signals have been flashing red, including The Conference Board’s Leading Economic Index (LEI).

The LEI has declined for 18 consecutive months, including a 0.7 percent drop in September. The LEI has fallen by 3.4 percent over the six-month span between March and September 2023.

“So far, the US economy has shown considerable resilience despite pressures from rising interest rates and high inflation,” Justyna Zabinska-La Monica, the senior manager of business cycle indicators at The Conference Board, said in a statement. “Nonetheless, The Conference Board forecasts that this trend will not be sustained for much longer, and a shallow recession is likely in the first half of 2024.”