- Fed Chair confirms central bank may ease magnitude of interest rate hikes
- U.S. stocks, bonds rally as investors celebrate scaled-down increases
- Jobs data remain key element in assessing progress on inflation
U.S. stocks jumped to the highest since mid-September and bonds surged Wednesday after Federal Reserve Chair Jerome Powell said the central bank may soon ease the magnitude of its interest rate hikes, even as it prepares to keep raising them for the next several months.
In a speech at the Brookings Institution in Washington, Powell reiterated the Fed's commitment to reducing inflation by sticking to the steady diet of hikes that it began in March. At the same time, Powell suggested the Fed may scale back to a 50 basis point increase at the bank's December meeting, down from four consecutive 75 bps hikes.
"The time for moderating the pace of rate increases may come as soon as the December meeting," Powell said, noting the time it takes for rate increases to sufficiently affect the economy.
Powell cautioned that investors should focus more on what the Fed still needs to accomplish to bring down inflation. "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," he said, "and the length of time it will be necessary to hold policy at a restrictive level."
Powell's comments come amid a flurry of macroeconomic data that have analysts—and the public—divided about the possibility of a recession in 2023. Just this week, a report showed that home prices fell in September for a third straight month, suggesting a recent downtick in mortgage rates hasn't yet rekindled demand. While job growth has remained strong, payroll processing firm ADP reported today that the private sector added 127,000 jobs in November, well below the 190,000 economists expected.
U.S. Financial Markets Rally
Powell's remarks didn't deviate from the central bank's message the past several weeks. His speech provided one of the last opportunities to do so before bank officials enter a no-comment period ahead of the Fed's Open Market Committee meeting in two weeks.
It solidified the Fed's stance that several more rounds of rate hikes remain necessary in its fight against inflation, which has surged this year to the highest levels since 1982 and left the central bank defending its decision against increasing rates sooner.
U.S. stocks rallied after Powell's comments. The S&P 500 rose 3.1% to close at to 4,080.07, the highest since Sept. 12. Bonds also rose, with the 10-year U.S. Treasury yield falling 5 basis points to 3.70%. (Bond yields fall when bond prices rise.)
Don't Lose Sight of the Fight, Powell Says
Despite this year's rate increases and recent inflation reports that appeared promising, Powell said no "clear progress" in cooling prices has yet occurred, even though U.S. economic growth has declined considerably in 2022.
"We can say that demand growth has slowed," he said, "and we expect that this growth will need to remain at a slower pace for a sustained period."
That's particularly true because the U.S. labor market remains unusually tight. Until that changes, Powell said, the Fed can't back off raising rates.
"In the labor market, demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2% inflation over time," he said, referring to the Fed's long-term inflation target. "Thus, another condition we are looking for is the restoration of balance between supply and demand in the labor market."
Powell's speech came two days before the U.S. Department of Labor releases its November jobs report. Economists expect the U.S. unemployment rate will rise to 3.8% from 3.7% in October, with non-farm job growth slowing gradually to 220,000 from 261,000 in October and 315,000 in September.
Soft-Landing or Recession?
U.S. Treasury Secretary Janet Yellen, speaking Wednesday at the New York Times Dealbook Summit, said monthly jobs and inflation data remain paramount in the minds of policymakers, but she's confident a path remains for the Fed to bring down inflation without causing a recession.
Aside from jobs, though, other areas of the economy continue weakening, raising concerns that a recession might be unavoidable. Perhaps the biggest is the housing market, accounting for one-sixth of the U.S. economy.
Mortgage rates have surged along with the Fed's hikes, with rates on 30-year fixed-rate loans rising as high as 7.24% earlier this month. They've fallen since, but not as much as the demand for home loans. Mortgage refinance applications and loan requests for home purchase applications dropped 86% and 41% this week, respectively, from the same week a year ago.
Recent housing market data reflect soft loan demand. Sales of existing U.S. homes have dropped for nine straight months, and U.S. home prices have fallen 2.6% in the past three months.