Federal Reserve Chair Jerome Powell hints at smaller rate hike next month in speech

Citing inflation that remains “much too high,” Federal Reserve Chair Jerome Powell signaled Wednesday that the central bank is likely to slow the pace of interest rate hikes next month but will continue to push rates higher than it initially planned.

His remarks are like to toss some cold water on hopes that the Fed would pull back its aggressive rate hike campaign after recent reports showed inflation easing and job growth slowing. Those hopes have buoyed stocks in recent weeks.

“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said in prepared remarks he plans to deliver at the Brookings Institution at 1:30 p.m.

But he added that “the timing of that moderation is far less significant than the question of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.”

“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,” Powell said.

He also said that restoring the balance between supply and demand in the economy “is likely to require a sustained period of below-trend growth.” That could bolster most economists’ forecasts for a recession next year.

Powell's speech largely echoed his comments earlier this month after the Fed raised its key short-term rate by three quarters of a percentage point for a fourth straight meeting to a range of 3.75% to 4% from near zero early this year.

But since then, a report showed overall inflation slowing to 7.7% annually in October from 8.2% the prior month, and a core measure that excludes volatile food and energy items falling to 6.3% from 6.6%, according to the consumer price index. 

Also, job gains totaled 261,000 last month, down from an average 381,000 the previous three months, while will average pay increases decreased to a still robust 4.7% from 5% in September.

Powell, however, said Wednesday, “it will take substantially more evidence to give comfort that inflation is actually declining. By any standard, inflation remains too high.”

He noted that another inflation measure the Fed watches closely has “moved sideways” this year.

He added, “I will simply say that we have more ground to cover.“

Goldman Sachs expects the Fed's key short-term rate to rise to a peak of 5% to 5.25% by May.

Powell noted that price increases for goods such as used cars, furniture and appliances, have moderated as supply chain troubles have eased. And he said that while rent continues to climb, it should ease sometime next year because rents on new leases have been dropping sharply.

But he said prices for services such as health care, education, restaurant visits and hotel stays is showing little sign of easing because wages make up their cost and have continued to advance because of pandemic-related labor shortages. That gap, he said, “appears unlikely to fully close anytime soon.”

That’s largely because many older Americans retired early during the pandemic and most of them aren’t likely to return to the labor force, he said. Powell said they make up more than 2 million of the 3.5 million employee shortfall in the labor force.

Also, he said, the working-age population has been growing more slowly because of a plunge in immigration and a surge in deaths during the pandemic, accounting for about 1.5 million workers.

Wage growth, Powell said, has ticked down but “remains well above levels that would be consistent with 2% inflation over time."

“Despite some promising developments, we have a long way to go in restoring price stability,” Powell said.will

Federal Reserve Chairman Jerome Powell speaks at a news conference following a Federal Open Market Committee meeting, Wednesday, Nov. 2, 2022, in Washington.