20 October 2023
Dear clients,
Fed Chairman Jerome Powell said more tightening of borrowing conditions will be needed to fight inflation, although rising market interest rates may make the central bank's own actions less necessary.
Speaking to the Economic Club of New York on Thursday, Powell agreed "in principle" that rising yields are contributing to further tightening of financial conditions and "at the margins" could reduce the need for additional Fed rate hikes.
It was not a direct endorsement of that view, but financial markets seemed to take it that way. As Powell spoke, investors were increasingly inclined to believe that the Fed was already done raising its short-term benchmark interest rate. Futures tied to the level of the Fed's discount rate now put the probability of another rate hike this year at less than one in three, compared with about 40% before Powell's speech.
Interest rates on 10- and 30-year Treasuries rose after the speech.
Since the Fed began raising interest rates in March 2022, the unemployment rate has changed little from its current 3.8%, below what most Fed officials believe is a non-inflationary rate, and overall economic growth has generally remained above the 1.8% annualized rate that Fed officials view as the economy's underlying potential.
Powell said the Fed is taking a "careful approach" to assessing whether to raise rates further, which left expectations that the Fed will leave the benchmark discount rate unchanged at the current range of 5.25% to 5.5% at its upcoming Oct. 31-Nov. 1 meeting.
"We can't yet know how long these lower rates will persist or where inflation will move in the coming quarters," Powell said. "That path is likely to be bumpy and take some time .... I and my colleagues are united in our desire to bring inflation down to 2% in a sustainable way."
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