Fed's Powell signals smaller interest rate hikes could begin in December

Federal Reserve Chairman Jerome Powell signaled the U.S. central bank will slow its interest rate increases at its meeting next month, but stressed that policymakers have more work to do in order to crush stubbornly high inflation. 

"The time for moderating the pace of rate increases may come as soon as the December meeting," Powell said Wednesday during a speech at the Brookings Institute in Washington, D.C. "Given our progress in tightening policy, the timing of that moderation is far less significant than the questions 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."

Still, he noted that "ongoing increases will be appropriate" and stressed that the focus on rate hike speed is less important than the question of how long rates should be held in restrictive territory.

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Stocks reversed their losses and climbed higher on Wednesday following Powell's remarks, with the Dow Jones Industrial Average up 318 points and the benchmark S&P index climbing 1.8%.

Ticker	Security	Last	Change	Change %
I:DJI	DOW JONES AVERAGES	43444.99	-305.87	-0.70%
I:COMP	NASDAQ COMPOSITE INDEX	18680.120875	-427.53	-2.24%
SP500	S&P 500	5870.62	-78.55	-1.32%

The Fed raised rates by 75 basis points at the beginning of November for the fourth straight meeting as it tries to wrestle inflation closer to its 2% target with the most aggressive tightening since the 1980s. The latest move put the target range of their benchmark rate to 3.75% to 4% — well into restrictive territory — from nearly zero in March.

A majority of traders expect the Fed to approve a smaller half-point rate hike at the conclusion of a two-day meeting Dec. 14, with just 17% forecasting another 75-basis-point increase. Smaller rate increases will afford the Fed more time to examine how tighter monetary policy, which works with a lag, is impacting the economy.

Powell said rates are likely to reach a "somewhat higher" level than policymakers initially forecast in September, when they projected a median rate of 4.6% in 2023. The Fed will release updated projections at the conclusion of its December meeting. 

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Although he acknowledged that inflation has shown early signs of cooling — consumer prices rose 7.7% in October from the previous year, the slowest pace since January — Powell pushed back against any assumptions that inflation will continue to moderate.

"It will take substantially more evidence to give comfort that inflation is actually declining. The truth is that the path ahead for inflation remains highly uncertain," he said, adding: "Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation."

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With inflation remaining stubbornly high despite the most aggressive rate hikes since the 1980s, Wall Street is increasingly convinced the Fed will trigger a recession sometime in the next 12 months. However, Powell said a so-called soft landing — or "softish" landing — remains "very plausible" and "still achievable," though he admitted the path to such an outcome is narrowing.

"We think that slowing down at this point is a good way to balance the risks," he said.