Federal Reserve Chairman Jerome Powell indicated that the Fed will keep interest rates steady at its next meeting but left the door open to hikes in following months if needed to curb inflation.
Powell delivered a much-anticipated speech before the Economic Club of New York on Thursday. The speech was being closely watched because it will be his last public comments before the two-day Fed monetary policy committee meeting at the end of the month.
“Given the uncertainties and risks, and how far we have come, the Committee is proceeding carefully,” Powell said. “We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.”
The address comes a day before Fed officials are forced into a media blackout and can’t discuss monetary policy with the press until after the central bank makes its interest rate decision on Nov. 1.
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Markets interpreted Powell’s speech as meaning there won’t be a hike at the next meeting as well. After the speech, investors assigned a 100% chance that the central bank will hold rates steady once again, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
While the speech presented no indication that a rate hike should be expected after the next meeting, it wasn’t entirely dovish and could rather be interpreted as balanced and cautious. He did suggest that the Fed could conduct more hikes down the line should the data indicate that inflation isn’t meaningfully falling.
“We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy,” he told the crowd.
Powell also touched on the strength of the economy in the face of the quick tightening, which began in earnest back in March of last year.
The economy grew at a 2.1% annual rate in the second quarter of this year, the Bureau of Economic Analysis recently reported, near the 2.2% pace the quarter before — showing strong growth even in the face of the Fed’s rate hikes.
Powell warned Thursday that the economy will likely have to slow even more before inflation drifted back down to the Fed’s target 2% level. Inflation was 3.5% in the year ending in August by the Fed's preferred index. He also hinted that the labor market, which is still strong (although showing some signs of cooling), will likely end up taking a hit.
“Forecasters generally expect gross domestic product to come in very strong for the third quarter before cooling off in the fourth quarter and next year. Still, the record suggests that a sustainable return to our 2% inflation goal is likely to require a period of below-trend growth and some further softening in labor market conditions,” he said.
David Russell, global head of market strategy at TradeStation, said after Powell’s speech that the chairman used the address to leave his options open and made a point of not talking in certainties given the volatility and unpredictability of the economic outlook.
“Jerome Powell continues to walk a middle line between hawk and dove,” Russell said. “The Fed still isn’t sure whether it’s done enough. He noted positives in the labor market, but it’s hard to get too dovish given this week’s retail sales and jobless claims. So, he’s keeping his options open and waiting for more clarity before committing either way.”
Also of note, as Powell was being introduced to deliver his speech, a group of climate protesters descended on the stage chanting, causing the address to be delayed as organizers scrambled to maintain control.
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“Off fossil finance, Jay, off fossil finance,” the protesters shouted as they appeared to try to sit on the dais where Powell was slated to speak.
The group was removed after a few minutes and Powell didn’t comment on the disruption once he began speaking.