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The Federal Reserve will proceed “cautiously” in its upcoming monetary policy decisions, its chairman said Thursday. It was the latest sign that the Federal Reserve was preparing to keep interest rates stable at its meeting later this month.

Jay Powell struck a cautious tone just days before the central bank’s planned “blackout” period ahead of a two-day meeting that begins Oct. 31, after which public communications will be limited.

Powell pointed to a number of risks that officials must now consider as they decide how much more pressure to put on the world’s largest economy to curb inflation. But he also emphasized that the effects of the Fed’s interest rate hike campaign over the last 18 months are not yet fully visible.

“A number of old and new uncertainties complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little,” he said in prepared remarks at an Economic Club of New York event.

“Given the uncertainties and risks and how far we have come, the [Federal Open Market Committee] Proceed with caution.”

The Fed’s interest rate policy outlook has been clouded recently by mixed economic data and additional geopolitical tensions sparked by the war between Israel and Hamas.

The “very elevated” geopolitical tensions “pose significant risks to global economic activity,” the Fed chair said, with “highly uncertain” implications.

A rise in U.S. borrowing costs has also complicated the Fed’s assessment of how much higher it should raise interest rates to curb inflation, especially at a time when price pressures persist in parts of the economy and labor demand remains high.

The yield on the benchmark 10-year Treasury note jumped to 4.996 percent – the highest since July 2007 – after Powell spoke. The two-year Treasury yield, which changes with interest rate expectations, fell 0.03 percentage point to 5.19 percent as investors bet that a quarter-point rate hike at the next Fed meeting is unlikely.

Many officials — including Lorie Logan, the hawkish Dallas Fed president, and Gov. Christopher Waller — have suggested that the rise in yields could offset the need for the central bank to raise interest rates again this year. Fed policymakers had previously indicated they expect the central bank would need to raise interest rates at least one more time this year to curb inflation.

Powell said the Fed is “attention” to the rise in yields, which could have “implications for the path of monetary policy.”

In a discussion following his remarks, Powell said the recent rise in borrowing costs did not appear to reflect market expectations of higher inflation or changes in the short-term interest rate outlook.

Rather, he said the rise in yields could reflect market participants’ view that the economy has proven more resilient than expected or traders’ worries about budget deficits. Asked whether the bond market moves could offset the need for further Fed rate hikes, Powell said: “On the sidelines, it could be.”

After ten consecutive rate hikes, the Fed paused its historic rate hike campaign for the first time in June before raising rates again by a quarter point in July. At its meeting last month it also decided against an increase.

But even as the pace of monetary tightening has slowed, officials insist it is still too early to declare victory in the fight against inflation.

Officials were surprised by the strength of the U.S. economy, which has maintained momentum despite one of the most aggressive rate-hiking campaigns in Fed history.

Powell said this could be because demand is less affected by changes in interest rates than in the past – or because interest rates have not been high “long enough.”

He also pointed out that the short-term “neutral interest rate” – a term economists use to describe the level of interest rates that neither stimulates nor suppresses demand – could be higher now than in the past.

Powell said the Fed will continue to look for signs that growth is not slowing enough or that the labor market remains tight, either of which “could justify further tightening of monetary policy.”

The event where Powell spoke was initially postponed after protesters stormed the stage, saying climate-related risks posed the biggest threat to the global economy.

Additional reporting by Kate Duguid in New York

Source : www.ft.com

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