U.S. Federal Reserve Chairman Jerome Powell holds a press conference after the release of the Fed’s decision to keep interest rates unchanged at the Federal Reserve in Washington, United States, on September 20, 2023.

Evelyn Hockstein | Reuters

Federal Reserve Chairman Jerome Powell will deliver a key policy address on Thursday aimed at reassuring markets that the central bank is committed to further curbing inflation but may now need a little less force.

The top monetary policymaker will address the Economic Club of New York at noon ET, at a critical time for the U.S. economy.

Inflation numbers have improved recently, but Treasury yields have risen, sending conflicting signals about the direction monetary policy might be heading. Markets are largely expecting the Fed to leave interest rates unchanged, but they will look to Powell for confirmation and clarification on how officials view both current conditions and longer-term trends.

“Powell keeps falling back on anything that helps reinforce the narrative that they need to remain vigilant, and for understandable reasons,” said Luke Tilley, chief economist at Wilmington Trust. “I just expect him to continue talking about the strength of the economy and the surprising strength of consumers in the third quarter as a risk to inflation. That’s enough ammunition to keep talking about staying vigilant.”

Essentially, Tilley expects the Powell message to fall into three parts: the Fed had to raise rates quickly, which it did; that it had to find a peak, which is part of the current debate; and that it needs to figure out how long interest rates need to stay this high to bring inflation back to its 2% target.

“Their ultimate goal is to keep financial conditions tight so that inflation falls,” he said. “He will use this framework, even if he takes a cautious stance on November 1st.” [the next Fed rate decision] or December to shift the aggressive stance to the third question, how long can you keep it that high.”

“Higher for longer” has become an unofficial mantra in recent days, with Philadelphia Fed President Patrick Harker mentioning the term specifically for his approach to politics earlier this week.

Harker was one of several Fed officials, including Gov. Philip Jefferson, who spoke earlier this month, and Christopher Waller, who spoke on Wednesday, who advocated holding off on rate hikes at least in the immediate future while they weigh the impact of incoming data. Waller said the Fed could “wait, watch and see” before changing interest rates.

Powell is expected to join the chorus on Thursday, although his message is full of caveats about not becoming complacent in the fight against inflation.

“Powell needs to present himself to investors as a dispassionate, neutral leader and let that happen.” [others] to act more aggressively,” said Jeffrey Roach, chief economist at LPL Financial. “They’re not going to declare victory, and that’s one reason why Powell will continue to speak somewhat hawkishly.”

New York Fed President John Williams added to that point on Wednesday when he repeated another familiar mantra that the Fed will need to “maintain its restrictive policies for some time” to deal with inflation . according to a Reuters report.

Like the other speakers, Powell is likely to reiterate the Fed’s data-driven focus after taking a much more aggressive course that saw it raise its key interest rate 11-fold to a total of 5.25 percentage points, the highest level in 22 years. The Fed decided not to raise interest rates in September.

However, he will also be asked for advice on what he thinks about rising yields, given that the 10-year Treasury note has slowly approached 5% – its highest level in 16 years.

The chairman “will stick with the message… that the data has been stronger than expected, but there has also been a strong move in yields that has tightened financial conditions, so there is no urgency for a policy response in November “The Fed can take a wait-and-see approach,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a note to clients.

Guha said a current Fed hold is merely a “down payment” on “additional rate cuts” for 2024 as both inflation and economic growth weaken.

Source : www.cnbc.com

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