Federal Reserve (Fed) Chairman Jerome Powell said on Thursday that evidence of additional strength in the US economy could put the progress of inflation at risk and that the US central bank could tighten its monetary policy further if it remains resilient. . Powell stated, in a speech during an event at the Economic Club of New York – which was initially interrupted by protesters – that interest rates will be kept restrictive until the Fed is confident that inflation will return to the 2% target. “We are paying attention to data that shows the strength of the economy and the job market,” he said, according to a transcript published on the Fed’s website.
According to the central banker, the extent of monetary tightening will continue to depend on data and the balance of risks, but uncertainties are making these judgments about the balance of risks difficult.
“Inflation data for September maintained a downward trend but was less encouraging,” he stated, reiterating that inflation is very high and that a few months of favorable data is just the beginning.
“To date, the fall in inflation has not come at the cost of significantly higher unemployment – a highly welcome but historically unusual development. The recovery of supply chains, together with the rebalancing of supply and demand in the labor market, allowed inflation to fall without substantially weaker economic activity. In fact, economic growth has consistently surprised positively this year, as seen most recently in the strong retail sales data released earlier this week,” he said.
He also said that returning to the inflation target will likely require a period of below-trend growth. “Many indicators suggest that although conditions remain tight, the labor market is gradually cooling,” he says.
Powell said, however, that geopolitical tensions are very high and pose important risks to global economic activity. “Our institutional role at the Fed is to monitor these developments for their economic implications, which remain highly uncertain. Speaking for myself, I found the attack on Israel horrific, as did the prospect of further loss of innocent life,” he stated.
On financial conditions, Powell said they have become significantly more restrictive in recent months and long-term bond yields have been an important factor driving this tightening. “We remain attentive to these developments because persistent changes in financial conditions could have implications for the trajectory of monetary policy,” he said.
MARKET REACTION:
STOCKS: The S&P 500 initially pared declines before reversing course and was last down 0.5%BONDS: The U.S. Treasury 10-year yield moved higher after a brief decline and was last at 4.97%.
FOREX: The dollar index added to losses initially before paring declines and was last down 0.17%.
COMMENTS: MICHAEL BROWN, MARKET ANALYST, TRADERX, LONDON
“Some decent USD downside seen, perhaps more than one would expect.
“Quite clear that the market is reading into Powell’s comments on tighter financial conditions potentially leading to the tightening cycle being done and dusted. Obviously other FOMC officials have said similar, but hearing so ‘from the horse’s mouth’ gives the statement extra credibility.”
MICHAEL JAMES, MANAGING DIRECTOR OF EQUITY TRADING AT WEDBUSH SECURITIES IN LOS ANGELES
“I don’t think he’s un-muddied the waters so much. The tone was a bit more dovish than other Fed officials recently. He addressed recent tightening in financial conditions as significant. He also talked about elevated geopolitical tensions posing risks to global economic activity.
“On the other hand he also didn’t remove the higher for longer bias as inflation has not yet come down to a level where the Fed is likely more comfortable.
“It’s hard to make too much of a determination about what happens with knee jerk reactions immediately after any type of Fed comments … There’s always going to be traders reacting quickly in both directions so trying to make any type of broad based assumption within 10 minutes of any fed official statements is a touch premature.”
CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NC
“Powell continued to leave optionality open for the Fed, in terms of future rate hikes, but did nothing to change the narrative that the Fed will keep rates unchanged at their next meeting and is relatively likely to keep them unchanged for the rest of this year as well (e.g. unchanged in December meeting as well).”