Federal Reserve Chairman Jerome Powell said Thursday that he and his policy colleagues were encouraged by the slowing inflation but were unsure whether they had done enough to maintain the momentum.

Just over a week after the central bank’s decision to keep interest rates stable, Powell said in a speech to an International Monetary Fund audience in Washington, DC that more work lies ahead in the fight against high prices.

“The Federal Open Market Committee seeks to achieve a monetary policy stance that is sufficiently restrictive to reduce inflation to 2 percent over time; we are not confident that we have achieved such a course,” he said in his prepared speech.

For the second time in recent weeks, a public speech by Powell was interrupted by climate protesters. He briefly left the stage before continuing.

The speech comes at a time when inflation is still well above the Fed’s long-standing target, but also well below its peaks in the first half of 2022. In a series of 11 rate hikes that represent the most aggressive monetary tightening since the early 1980s the committee planned to reduce its key interest rate from close to zero to a target range of 5.25% to 5.5%.

These increases coincided with the Fed’s preferred inflation indicator, the core personal consumption expenditures price index, falling to an annual rate of 3.7% from 5.3% in February 2022. The broader consumer price index peaked in June from over 9% last year.

Powell said inflation is “well above” the level the Fed would like to see.

“My colleagues and I are pleased with this progress, but believe that the process of sustainably reducing inflation to 2 percent still has a long way to go,” he said.

After the speech, stock prices fell, with the Dow Jones Industrial Average falling almost 200 points. Treasury yields jumped after falling for much of the past three weeks, driven in large part by a poorly received auction of 30-year bonds.

“Chairman Powell warned investors that they are being overly optimistic about the prospect of interest rate cuts next year,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed will remain true to its mandate and continue to raise interest rates if inflation picks up again.”

As in his recent speeches, Powell emphasized that the Fed could still be cautious as the risks between too much and too little trading have converged.

“If it is appropriate to further tighten the policy, we will not hesitate to do so,” he said. “However, we will continue to proceed cautiously to manage both the risk of being misled by a few good months of data and the risk of tightening too tightly.”

Markets are largely convinced that the Fed will raise interest rates.

According to the CME Group, the likelihood that the FOMC will approve a final rate hike at its Dec. 12-13 meeting is less than 10% at forward prices, although committee members had predicted another quarter-percentage point increase in September at the end of the year .

Traders expect the Fed to begin cutting interest rates next year, probably around June.

Powell pointed to the progress the economy has made. Gross domestic product accelerated a “fairly strong” 4.9% annual rate in the third quarter, although Powell said the expectation was that growth would “moderate in the coming quarters.”

Unemployment remains low, although the unemployment rate has risen half a percentage point this year, a move usually associated with recessions.

But Powell indicated that the Fed was “alert” that stronger-than-expected growth could undermine the fight against inflation and “warrant a monetary policy response.”

He also noted that improvements in supply chains have helped reduce inflationary pressures, but “it is not clear how much more can be achieved through additional improvements on the supply side. Going forward, a larger share of progress in reducing inflation may have to come from tight monetary policy that slows aggregate demand growth.”

The remarks are part of a broader presentation he is giving at the Jacques Polak annual research conference. A broad policy issue he touched on was the challenge of keeping interest rates close to zero, where they were before inflation rose. Powell said it was “too early” to say whether the zero interest rate challenges “are a thing of the past.”

Source : www.cnbc.com

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