The Federal Reserve will slow down the pace of interest-rate hikes, Chair Jerome Powell said on Wednesday, giving markets hope that the aggressive cycle of rate increases will ease up.
“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said in remarks delivered at the Brookings Institution.
Stock markets surged in afternoon trading, with the S&P 500 gaining 3.1% to close at 4,080. The Dow rose 2.2%, to 34,590, while the tech-heavy Nasdaq soared 4.4%.
Inflation fight has “long way to go”
Powell noted that, while the central bank may ultimately raise rates to a higher level than it initially planned, it would do so in smaller increments.
“It is likely that restoring price stability will require holding (interest rates) at a restrictive level for some time,” Powell said. “History cautions strongly against prematurely loosening policy.”
Still, he sounded a note of caution.
“We don’t want to overtighten, so that’s why we are slowing down, and we are going to find our way to where the right level is,” Powell told the audience.
Powell acknowledged there has been some good news on the inflation front, with the cost of goods such as cars, furniture and appliances in retreat. He also said that rents and other housing costs — which make up about a third of the consumer price index — were likely to decline next year.
But the cost of services, which includes dining out, traveling and health care, are still rising at a fast clip and will likely be much harder to rein in, he said.
“Despite some promising developments, we have a long way to go in restoring price stability,” Powell said.
Powell emphasized that the labor market continues to be too hot for the Fed’s tastes. While job openings fell in October, there are still about 1.7 open jobs for every unemployed worker who is looking for work, signaling “a real imbalance between supply and demand” for workers.
He added that services costs are mostly pushed higher by rising wages, which have been growing at the fastest pace in four decades but are still below the rate of inflation.
The lack of workers reflects a jump in early retirements, the death of several hundred thousand working-age people from COVID-19, and a sharp decline in immigration and slower population growth, he said.
Scrutiny of wage increases
Many progressives have accused Powell of prioritizing price drops over full employment. Despite the Fed’s scrutiny of wages, there is no evidence that current inflation bout is caused by workers’ pay increases. Powell delivered a rebuke, saying that to have an economy that grows over the long term, inflation must come down.
“If you’re constantly fighting off inflation, and it goes on for five, 10 years, you can’t have full employment,” he said.
Last month’s inflation report showed that prices rose 7.7% in October from a year earlier, straining many families’ budgets but down from a 9.1% peak in June.
Supersized rate hikes
The Fed has lifted its key rate six times this year, to a range of 3.75% to 4%, the highest in 15 years. Those increases have sharply boosted mortgage rates, causing home sales to plunge, and it has raised costs for most other consumer and business loans.
Fed officials forecast in September that they would ultimately push their short-term rate somewhere between 4.5% to 4.75% by next year. Powell suggested Wednesday that rates will likely go higher than that. Many economists forecast the Fed’s key rate will rise to at least 5% to 5.25%.
At the Fed’s last meeting in November, it hiked rates by a hefty three-quarters of a point for the fourth straight time. Powell signaled at the time that its next increase would likely be only a half-point, still a significant step up. Typically the central bank moves interest rates in quarter-point increments.
CBS News’ Irina Ivanova contributed reporting.
