Federal Reserve Chairman Jerome Powell said Wednesday that he thinks there's a good chance for smaller rate hikes, beginning next month, but needs "substantially" more evidence that inflation is slowing before the central bank can pivot from its aggressive tightening policy.
In prepared remarks for a speech at the Brookings Institution in Washington, Powell said the path ahead for inflation is "highly uncertain", even following what he called the "welcome surprise" of a slower-than-expected October reading.
The Fed Chair noted, however, that the pace of rate hikes remains less important than the destination of the Fed Funds rate, which markets expect to peak at between 5% and 5.25% next year. Powell said restoring price stability will likely mean keeping rates at that elevated level "for some time", adding that he doesn't want to have to cut rates anytime soon, so he is being careful not to "over-tighten".
"There is considerable uncertainty about what rate will be sufficient, although there is no doubt that we have made substantial progress, raising our target range for the federal funds rate by 3.75 percentage points since March," Powell said. "As our last post-meeting statement indicates, we anticipate that ongoing increases will be appropriate. It seems to me likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting and Summary of Economic Projections."
"Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt," he added. "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. The time for moderating the pace of rate increases may come as soon as the December meeting."
On Wall Street, U.S. stocks pared some of their earlier declines following the publication of Powell's comments, with the S&P 500 rising 57 points on the session and the Dow Jones Industrial Average rose 247 points from last night's close. The tech-focused Nasdaq was up 284 points.
Benchmark 10-year Treasury note yields fell 8 basis points to 3.698% while 2-year notes slumped 14 basis points to 4.428%. The U.S. dollar index, which tracks the greenback against a basket of its global peers, fell 0.52% to 106.260.
The CME Group's FedWatch is pricing in a 77% chance of a 50 basis point Fed rate hike next month in Washington, up from around 69% prior to Powell's speech and 48% at the end of October.
Powell's remarks Wednesday largely reflect the substance of minutes from the Fed's last policy meeting in November, where the Open Markets Committee delivered their fourth consecutive 75 basis point rate hike, taking the Fed Funds rate to its current level of 3.75% to 4%.
"A number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the Committee’s goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate," the minutes read.
"In addition, a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate."
