The Fed: Powell says pace of interest-rate increases can slow as soon as December meeting

While slowing the pace of interest rate hikes is dovish, Powell tried to balance his message by making make two hawkish points.

He said the ultimate level of rates would have to be higher than was thought a few months ago and he tried to keep any talk of rate cuts off the table.

“History cautions strongly against prematurely loosening policy,” he warned.

Markets expect the Fed will lift the Fed funds rate by a half percentage point at its meeting in mid-December. That would bring the Fed’s benchmark rate to 4.25%-4.5% range.

This would follow four rate rises of 0.75 percentage points since June.

In September, the Fed said it expected the “terminal” level of its benchmark rate would be in the range of 4.5%-4.75%, but economists think the central bank intends to hike until rates are somewhere between 5% and 5.5%.

For example, economists at Goldman Sachs now expect the Fed to slow the pace of rate hikes to 50 basis points in December, followed by three 25 basis point hikes in February, March and May, raising the benchmark rate to a peak of 5%-5.25%.

In the remainder of his remarks, Powell delved more deeply into the outlook for inflation that he has done all year.

“The truth is that the path ahead for inflation remains highly uncertain,” Powell said.

Based on data released earlier this month, Powell forecast that inflation as measured by the 12-month personal consumption expenditure index would slow to 6% in October from 6.2 % in September and the core rate, excluding food and energy, would slow to 5% from 5.1% in September.

Inflation is too high and has moved “stubbornly sideways,” he said.

“Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation,” Powell said.

“It will take substantially more evidence to give comfort that inflation is actually declining,” he said.

Powell laid out some components to watch.

First of all, the prices of core goods should begin to exert downward pressure on overall inflation in coming months, the Fed chairman said.

Secondly, measures of 12-month inflation in new leases have been falling since midyear.

“As long as new lease inflation keeps falling, we would expect housing services inflation to begin falling sometime next year,” he said.

And lastly, Powell said wages are growing at a pace well above what would be consistent with the Fed’s 2% inflation target.

“We are looking for a restoration of balance between supply and demand in the labor market,” he said.

Markets welcomed the downshift in the pace of rate hikes. Stocks
DJIA,
+0.69%
SPX,
+1.40%
moved higher after Powell’s speech was released and the yield on the 10-year Treasury note
TMUBMUSD10Y,
3.696%