Federal Reserve Chair Jerome Powell set the table for a 50-basis point rate hike at the Fed's December policy meeting, saying in a speech on Wednesday it makes sense to "moderate" rate hikes as the Fed approaches its estimated peak in benchmark interest rates.
“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,” Powell said in a speech at the Brookings Institution in Washington. “The time for moderating the pace of rate increases may come as soon as the December meeting.”
Powell says it’s prudent to slow down the pace of hikes given monetary policy takes time to filter through the economy.
"The full effects of our rapid tightening so far are yet to be felt," he said.
Powell also argued slowing down rate hikes — and holding rates longer at a high level — is a form of risk management to guard against raising rates too high and causing a recession.
"I don’t want to overtighten," Powell said, "[but] cutting rates is not something we want to do soon. So that’s why we’re slowing down and will try to find our way to what that right level is."
Powell reiterated the pace of rate hikes isn’t as important as how much further the Fed will raise its benchmark interest rate, and for how long the central bank will hold rates at elevated levels.
The Fed has raised the target range for its benchmark interest rate by 0.75% at each of its last four meetings. At the current target range of 3.75%-4%, the Fed's benchmark interest rate is at the highest level since 2007.
“It is likely that restoring price stability will require holding policy at a restrictive level for some time,” said Powell. “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
Powell said he thinks it’s likely the Fed will need to raise rates “somewhat” higher than estimated in September, and that there was “considerable uncertainty about what rate will be sufficient.”
“We need to raise interest rates to a level that is sufficiently restrictive to return inflation to 2 percent,” he said. Powell’s comments largely echo what the Fed Chair said during his press conference in November as well as minutes from the central bank’s last policy meeting.
Despite some promising developments on the inflation front, Powell said, “we have a long way to go in restoring price stability.” Powell dubbed his speech a progress report on the Fed’s efforts to restore inflation to its 2% goal. The Fed Chair said inflation remains “far too high.”
While inflation data in October showed a decline, Powell cautioned this was only a single month’s data point. A data point which followed upside surprises over the previous two months.
The Fed will get a read on inflation from its favored inflation gage — the personal consumption expenditures index – on Thursday morning. The consumer price index for November will be released on December 13, the day the Fed's next two-day policy meeting begins.
The Fed’s Beige Book report released Wednesday — a compilation of anecdotal economic reports across the Federal Reserve’s 12 bank districts — showed the pace of price increases slowed, citing improvements in supply chains and weakening demand. The report also noted rent growth started to moderate in some districts, with downward pressure coming on retail prices, as consumers bought on discount.