The Fed is keeping interest rates unchanged, and Powell is hedging on the possibility of the end of the tightening campaign

  • The central bank interest rate remains in the range of 5.25%-5.50%.
  • The Fed says the economy grew at a “strong” pace in the third quarter
  • Traders are adding to bets that the Fed is done raising interest rates

WASHINGTON (Reuters) – The Federal Reserve kept interest rates steady on Wednesday as policymakers struggled to determine whether financial conditions might actually be tight enough to control inflation, or whether the economy… He continues to exceed expectations. He may need more self-control.

Federal Reserve Chairman Jerome Powell said the situation remains something of a puzzle, with US central bank officials prepared to raise interest rates again if progress on inflation falters, and concerned that higher market-based interest rates could start to impact the economy in a big way. And try not to disrupt the ongoing dynamic of steady growth in jobs and wages too much.

In a news conference after the end of the two-day policy meeting, Powell said the best course of action right now, given the uncertainty, is to keep the Fed’s benchmark overnight interest rate in the current 5.25%-5.50% range, and see how it develops. Jobs and price data from now until the next policy meeting in December.

Nearly 20 months after the Fed tightened monetary policy, Powell said it remains unclear whether overall financial conditions are still tight enough to tame inflation, which he still views as well above the central bank’s 2% target. .

“We are not confident that we have not done that, and we are not confident that we have reached” this sufficiently restrictive stage, Powell told reporters. “Inflation has come down, but it is still well above our 2% target… A few months of good data is only the beginning of what it will take to build confidence.”

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Annual inflation, based on the Fed’s preferred measure, reached 3.4% in September for the third month in a row. Excluding volatile food and energy costs, the rate was 3.7%, little changed from August.

Asked whether the Fed maintained its bias toward raising interest rates versus keeping policy on hold, Powell replied, “That’s the question we’re asking. Should we raise rates further?”

Market prices in focus

But the Fed chair also acknowledged that the recent market-driven rise in Treasury yields, mortgage interest rates and other financing costs could have its own impact on the economy as long as it continues, and Fed officials will be watching those effects closely as they move. Consider whether interest rates will be raised by the central bank again.

“Rising Treasury yields lead to higher borrowing costs for households and businesses. These higher costs will weigh on economic activity to the extent that this tightening continues,” Powell said, taking in particular consideration of 30-year fixed-rate mortgages. That’s close to 8%, near a 25-year high.

Powell’s comments explained a policy decision and a statement that although he left the Fed’s benchmark interest rate unchanged for the second meeting in a row, he also took stock of what he called the “huge” 4.9% annual pace of US economic growth in the July-September period after… A boom in consumer spending.

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“Economic activity expanded at a strong pace in the third quarter,” the US central bank said in its statement after policymakers unanimously agreed to leave interest rates unchanged. The language represents an upgrade to the “strong pace” of activity the Fed saw as of its September meeting.

US stocks rose after the policy statement and closed higher today, while the US dollar (.DXY) pared its gains and closed flat against a basket of currencies. US Treasury yields fell and short-term US interest rate traders increased bets that the Fed is done raising interest rates and will start cutting rates by June next year.

“The statement leans to the cautious side,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “The fact that they left rates unchanged for the second time in a row suggests that the Fed may leave rates unchanged in December. If they do, it means the Fed is done.”

Although markets believe the Fed’s rate hike campaign is over, data pointing to a stronger-than-expected economy and labor market kept the possibility of another rate hike on the table.

Powell noted that much of the recent economic performance has been constructive, with lower unemployment and higher wages fueling more demand for goods and services and creating more jobs – the kind of virtuous cycle that leads, within limits, to self-sustaining growth.

The issue for the Fed is whether conditions will remain so strong that progress on inflation stalls or even reverses.

“It was good,” Powell said. “We have made progress on inflation in the middle of this…the question is how long can this continue?” he added.

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Chances are, he said, a slowdown of some sort is needed, with the Fed committed to finding the policy stance that makes that happen.

“It is still possible…we will need to see some slowdown in growth and some decline in the labor market…to fully restore price stability,” Powell said.

His comments cast focus on upcoming employment and inflation data, with the Labor Department’s monthly jobs report released on Friday the first major piece of data that will shape the Fed’s deliberations at its December meeting.

Howard Schneider reports. Edited by Paul Simao

Our standards: Thomson Reuters Trust Principles.

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Covering the US Federal Reserve, monetary policy and economics, he is a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics correspondent and local staff for The Washington Post.

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