Powell signals Fed will slow pace of rate increases

In a speech today, Federal Reserve Chairman Jerome Powell said while inflation remains persistently high, the Federal Open Market Committee may slow the pace of increases in the federal funds rates starting as early as its December meeting. The FOMC has raised the rate six times this year, including four rate increases of 75 basis points each. Powell said it will take time for the effects of those policy decisions to play out. “Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” he said.

The FOMC will meet Dec. 13-14. Powell and other FOMC members have stressed that the committee will need to maintain a restrictive policy stance until inflation shows signs of returning to the Fed’s 2% target. Powell said during his speech that while forecasts from the private sector and FOMC participants show a significant decline in inflation over the coming year, they have been predicting a decline for more than a year “while inflation has moved stubbornly sideways.”

“Growth in economic activity has slowed to well below its longer-run trend, and this needs to be sustained,” Powell said. “Bottlenecks in goods production are easing and goods price inflation appears to be easing as well, and this, too, must continue. Housing services inflation will probably keep rising well into next year, but if inflation on new leases continues to fall, we will likely see housing services inflation begin to fall later next year. Finally, the labor market, which is especially important for inflation in core services ex housing, shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation over time. Despite some promising developments, we have a long way to go in restoring price stability.”

In a Q&A session after his remarks, Powell reiterated his view that it is still possible to have a “soft or a soft-ish landing,” that would be characterized by unemployment increasing but not spiking far enough to cause a severe recession. He acknowledged, however, that the path to such a landing has narrowed, and that “to the extent, we need to get rates higher or keep them higher longer, that’s going to narrow the path to a soft landing.”