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Jay Powell has sought to push back on speculation that the Federal Reserve had won its fight against inflation, even as traders boosted bets that the US central bank could start cutting interest rates as early as next March.
In a speech on Friday, the Fed chair indicated that it was too soon to rule out further rate rises or to start discussing cuts.
“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” he said, just before the start of a quiet period preceding its final monetary policy meeting of the year.
After Powell’s remarks, yields on policy-sensitive two-year Treasury notes dropped 0.14 percentage points to a five-month low of 4.56 per cent, suggesting investors were largely brushing off his warnings. Traders in federal funds futures markets now see about a two-thirds chance of the Fed reducing rates as early as March 2024, up from about 20 per cent a week ago.
Stocks also rallied, with the S&P 500 ending the day up 0.6 per cent at 4,594.63, its highest close since March 2022.
“A few weeks ago, Powell said policy is restrictive but (on Friday he added that) he believes policy is ‘well into restrictive territory’. I think it’s fair for markets to latch on to that subtlety,” said Jeffrey Roach, chief economist for LPL Financial.
Gold reached an all-time high, rising as much as 1.9 per cent to a peak of $2,075.09 a troy ounce, surpassing the previous intraday peak it had set in August 2020.
The metal tends to gain when the dollar weakens, as the currency has been doing on expectations that the next move in US rates will be lower.
In roughly two weeks’ time, the Federal Open Market Committee is preparing to again keep its benchmark policy rate steady at a 22-year high of 5.25 to 5.5 per cent, a level it has maintained since July. The Fed began a historic drive to raise interest rates in March 2022 in an effort to stamp out surging inflation.
But even as the Fed continues to pause its rate-rising campaign, the high degree of uncertainty about the US inflation outlook and concerns about easing conditions in financial markets left officials wary. They have refrained from signalling more definitively that it has reached a peak in interest rates and discussing criteria for lowering borrowing costs.
For cuts to be considered, the Fed needs to see several inflation reports that corroborate this trend.
Powell on Friday affirmed this message, warning at an event at Spelman College in Georgia that the US central bank was “prepared to tighten policy further if it becomes appropriate to do so”, even as he made clear that the policy was “well into restrictive territory” and that the full effects of the Fed’s past actions have yet to materialise.
In a discussion at the event, he stressed that the Fed would be closely monitoring economic data. “Let the data reveal the appropriate path,” he said.
“While the lower inflation readings of the past few months are welcome, that progress must continue if we are to reach our 2 per cent objective,” he said.
Also on Friday, Austan Goolsbee, president of the Chicago Fed and a voting member on the FOMC this year, said that so far there was “no evidence” that inflation was going to stall at 3 per cent, and instead forecast that it will fall back to the Fed’s longstanding 2 per cent target.
As of October, the core personal consumption expenditures price index — the Fed’s preferred inflation gauge — registered an annual pace of 3.5 per cent.
Additional reporting by Kate Duguid in New York
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