[Summary] Fed's Powell on Halting Rate Hikes: "Premature, Final Rate Will Be Higher"

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] "The central bank still has a way to go."

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), who decided on four consecutive giant steps (0.75 percentage point hikes in the benchmark interest rate), drew a line on the possibility of halting rate hikes, calling it "premature." Regarding the speed adjustment that the market had been expecting, he hinted at an ambiguous stance that nothing has been decided yet. He predicted that the final rate would be higher than initially expected.

At a press conference held immediately after the Federal Open Market Committee (FOMC) regular meeting on the afternoon of the 2nd (local time), Chairman Powell said, "It is very premature to think or talk about stopping rate hikes," and "We have a ways to go."

The Fed announced in a statement after the FOMC regular meeting that it would raise the federal funds rate by 0.75 percentage points from the previous 3.0-3.25% to 3.75-4.0%. This was an unusual decision to implement four consecutive giant steps as inflation showed little sign of easing despite high-intensity tightening.

In particular, the statement included dovish phrases such as "taking into account the cumulative tightening monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments," and "ready to adjust monetary policy appropriately if risks arise," which bolstered expectations for future policy adjustments.

However, Chairman Powell dismissed these expectations at the subsequent press conference. From the first Q&A, he said, "It is true that the pace (of rate hikes) is historically fast, but we must not forget that rates started from zero," and "continuing to raise at a fast pace is to curb inflation," breaking the dovish tone of the statement.

Regarding the possibility of a 0.5 or 0.75 percentage point hike in December, he responded, "I think it is appropriate to continue raising rates," and "Looking at various data such as price indicators, I cautiously expect that we may need to raise more than initially thought."

He said, "At some point, we can stop raising rates and maintain them. That could be the next meeting," but drew a line by saying, "But ultimately, nothing has been decided yet." He added, "It is difficult to say that the current financial environment is too tight," emphasizing, "The central bank still has a way to go. Our decisions depend on incoming data and the impact on economic activity forecasts." This essentially confirmed the data-driven tightening stance consistent with previous FOMCs. He also predicted that the final rate would be higher than previously expected.

Chairman Powell explained, "People hear about lags and think about stopping (rate hikes)," and "There is no conversation about stopping rate hikes now. I hope people understand our determination (for price stability)." He repeated that current inflation is not falling as much as the Fed wants and that "sufficiently restrictive, tight measures must continue."

Regarding current U.S. consumption, he evaluated, "Consumers have purchasing power and it looks okay." He expressed hope by saying that although the possibility of a soft landing has decreased, "I still think it is possible."

This 0.75 percentage point hike by the Fed was a step expected by the market. The September Consumer Price Index (CPI) released last month rose 8.2% year-on-year, raising concerns about inflation entrenchment, and recent employment data supported a strong labor market. Accordingly, the interest rate inversion gap between South Korea (3.0%) and the U.S. widened to a maximum of 1.0 percentage point. This is the same level as from March 2018 to February 2020, raising concerns about foreign capital outflows and depreciation of the Korean won in the future.

On Wall Street, hawkish voices carry more weight. Jack McIntyre, portfolio manager at Brandywine Global, evaluated, "Chairman Powell's remarks were quite hawkish." He said, "There was no dovish signal that the Fed would pause," and that the statement's mention of considering the lagged effects of cumulative tightening suggested flexibility to slow the pace. He emphasized that going forward, CPI, employment data, and China's zero-COVID policy's ongoing global impact are more important than signals from the Fed.

Ma Young-yu, chief investment strategist at BMO Wealth Management, also hawkishly evaluated, "Chairman Powell made it clear that it is better to tighten excessively than to tighten a little to avoid the risk of inflation entrenchment." On the other hand, Jim Caron, senior advisor at Morgan Stanley, said right after the statement release that the Fed's tightening is entering its final phase and "it looks like the start of the endgame."

The New York stock market fluctuated. The New York stock market, which started lower awaiting the FOMC regular meeting results, rose after 2 p.m. when the monetary policy decision document was released, buoyed by the phrase that policy changes are possible if necessary. The S&P 500 and Nasdaq indices, which had been in a downtrend, turned to gains, and the Dow Jones index slightly expanded its gains. However, immediately after Chairman Powell's press conference began and his key remarks were disclosed, the New York stock market sharply turned downward.

This content was produced with the assistance of AI translation services.