Fed’s Powell signals caution on rate hikes, notes yield surge as de facto tightening

Fed Chair Jerome Powell, in his speech at the Economic Club of New York, asserted that while the option for an additional rate hike remains open, a prudent and careful approach will be the governing principle. Market participants, digesting Powell’s words, now overwhelmingly anticipate an extension of Fed’s pause in November, a sentiment reflected in fed fund futures pointing towards a 100% chance of this outcome. Referring to the recent rise in yields, he said it might have an effect “at the margins” on reducing the necessity for further rate hikes.

Powell suggested that the surge in yields might be linked to growing concerns surrounding fiscal deficits and mentioned that the process of Quantitative Tightening could also be influencing it. Highlighting that the uptick in yields acts as a de facto policy tightening, Powell raised the possibility that this might reduce the need for aggressive rate hikes in the future.

Although inflation metrics have dipped during the summer, Powell emphasized, “inflation is still too high, and a few months of good data are only the beginning.” The inflation outlook remains uncertain, marked by the unpredictability of its stabilization point in the upcoming quarters, and Powell concedes that, “the path is likely to be bumpy.”

With an eye on economic growth and labor market dynamics, Powell indicated that persistent above-trend growth or sustained labor market tightness could trigger a reevaluation of the inflation outlook. Such developments “could warrant further tightening of monetary policy.”

Underscoring the complexities and potential pitfalls ahead, Powell stated, Committee is “proceeding carefully.” “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,” he added.

Full prepared remarks of Fed Powell here.