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Fed's Powell: Rate hikes may slow next month, inflation struggle far from over

Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – Federal Reserve Chairman Jerome Powell said, The U.S. central bank may scale back its pace of interest rate hikes “as soon as December,” while warning that the fight against inflation is far from over and key questions remain unanswered, including how far and for how long interest rates ultimately need to rise.

“Tension makes sense,” Powell said in a speech at the Brookings Institution: “As we get closer to a level of restraint sufficient to keep inflation down, the pace of our rate hikes will pick up.” The time to slow the pace of rate hikes may come as soon as the December meeting. Washington think tank.

However, in a speech highlighting the work that remains to be done in controlling inflation, Powell said the issue was “much less important than the question of how much further we need to” control inflation Inflated interest rates, and the length of time that policy needs to be held, are at restrictive levels.”

While the Fed chair did not specify what his estimated “terminal rate” is, Powell said it could be “slightly higher That was the 4.6 percent September forecast that policymakers pointed to at their meeting. Curing inflation “will require keeping policy at restrictive levels for some time,” he said, a comment that appeared to run counter to market expectations that the U.S. central bank could start cutting rates next year as the economy slows.

“We’re going to stay the course until the job is done,” Powell said, noting that while some data point to a slowdown in inflation next year, “there’s still a long way to go to restore price stability .. …Despite tightening policy and slower growth over the past year, we have not seen significant progress in slowing inflation.”

Fed on 47 The response to the fastest burst of inflation in the US in 2009 was an equally sudden increase in interest rates. Expected to add 0.5 percentage points at its December 14-14 meeting, the central bank will Its overnight policy rate was raised to a range of 4.14%-4.50% from near zero in March, which is The fastest rate change since former Federal Reserve Chairman Paul Volcker battled rising prices.

This makes home mortgages and other forms of credit more expensive for consumers and businesses.

However, it has not had any noticeable impact on the U.S. job market, where the current 3.7% unemployment rate has led some policymakers to argue that they are free to raise revenues further without much risk. tight interest rates.

But the fact that it hasn’t yet had a convincing impact on inflation makes it likely that the Fed will need to raise rates further into what it calls “restrictive” territory as the economy slows.

Powell said the Fed’s inflation forecasts for October showed its preferred measure was still growing at about three times the central bank’s 2% target.

“A long way to go” GO’

Powell’s comments sparked a strong rally in the stock and bond markets, with the Federal Reserve aggressively raising interest rates this year. Stock and bond markets were hit hard.

The benchmark S&P 500 index surged into positive territory, ending the day up around 1.5%, while Bond yields all fell in the opposite direction of their prices. The yield on the 2-year U.S. Treasury note, the most sensitive to Fed rate expectations, fell from 4.50 to around 4.40% %. The dollar weakened against a basket of currencies of its major trading partners.

In the interest rate futures market, traders further bet the Federal Reserve would slow the pace of rate hikes when it meets in two weeks.

“You can’t raise rates as fast as they do,” said Rick Meckler of Cherry Lane Investments in New Vernon, New Jersey. Hear its comfort there.”

Powell noted that while commodity inflation has been easing, housing costs are likely to continue rising into next year, while key price indicators for services remain high and the labor market tight.

“The growth in economic activity has slowed to well below its long-term trend,” Powell said. But for inflation to slow, “it needs to be sustained. The bottleneck in commodity production is easing, and commodity price inflation appears to be slowing, and that has to continue.” But “we may see housing services inflation start to drop later next year,” he said. Citing data released earlier on Wednesday showing that about 1.7 jobs were still vacant for every unemployed person, he said, “So far, we’ve only seen the first signs of a slowdown in labor demand.”

“Despite some promising developments, we are still a long way from restoring price stability.”

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