[FOMC] Powell Says Long Way to Go... Slows Pace but Raises Interest Rates Further

[Asia Economy New York=Special Correspondent Joselgina] "The U.S. Federal Reserve (Fed) will slow down the pace, but the final interest rate level will be higher."

This summarizes in one sentence the content of the press conference held by Fed Chair Jerome Powell immediately after the November Federal Open Market Committee (FOMC) meeting. Powell dismissed the possibility of stopping rate hikes by saying "there is a long way to go," while leaving room for a pace adjustment.

This is interpreted as a message that the pace of future rate hikes will slow down but will continue for a longer period and reach a higher level. On Wall Street, the Fed, which decided on four consecutive giant steps (raising the benchmark interest rate by 0.75 percentage points), is being evaluated as effectively signaling the era of a "5% benchmark interest rate."

◆ Powell Leaves Room for Pace Adjustment

During the press conference held on the afternoon of the 2nd (local time), questions about adjusting the pace of rate hikes poured in from the beginning. Since four consecutive giant steps had been anticipated early on, the market’s focus that day was on the size of the increase after December.

Powell drew a line on the possibility of stopping rate hikes, calling it "premature." He said, "As rates move into restrictive territory, ‘how high’ and ‘how long’ are more important than ‘how fast,’" and reaffirmed that there is still "some ground to cover" before reaching an appropriate rate level, indicating that tightening will continue for the time being.

He also said, "The final rate level will be higher than previously expected," and evaluated that "overtightening is easier to correct than undertightening."

However, Powell left room for the possibility of slowing the pace of hikes, so-called pace adjustment. He said, "I said it would be appropriate to slow the pace of rate hikes, and that time is approaching," adding, "That could be as soon as the next meeting (December) or the following meeting (January)." He further noted, "Nothing has been decided yet," and that it depends on the indicators and economic impact to be announced during the remaining period.

While leaving the door open for pace adjustment, he essentially confirmed the tightening stance based on data similar to previous FOMCs. The current U.S. benchmark interest rate rose to 3.75?4.0%, the highest since 2008, due to the four consecutive giant steps on that day.

[Image source=Reuters Yonhap News]

◆ Final Rate Increase Forecast, 5% Outlook Continues

Powell’s remark that "the final rate could be higher" is expected to be reflected in the dot plot next month. In the dot plot released in September, the forecast for the final rate next year was 4.5?4.75% (median 4.6%). By clearly stating it will exceed this, it is widely interpreted as signaling the era of 5% rates.

Citibank raised its final rate forecast from 5.0?5.25% to 5.25?5.5%. JP Morgan also expects the December dot plot to be revised upward. The interest rate futures market reflects more than a 60% chance that U.S. rates will exceed 5.0% by March next year.

On Wall Street, interpretations emphasizing a hawkish (monetary tightening) stance are pouring in. Mike Feroli, JP Morgan’s chief economist, summarized the FOMC as "Slower for longer." The Fed may ease the size of rate hikes starting as early as next month but raise the final rate to a higher level and maintain it for a long time. ING also reported that "the outlook for the pace of rate hikes has been lowered, but the duration is expected to be longer."

Before the press conference, the statement included the sentence, "We will consider the cumulative effects of tightening monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments," which briefly raised market expectations for policy adjustment.

Jack McIntyre, portfolio manager at Brandywine Global, said, "Powell’s remarks were quite hawkish," and noted that mentioning the lagged effects of cumulative tightening in the statement suggests flexibility to slow the pace rather than a policy shift.

RBC pointed out that Powell mentioned the final rate before the December Summary of Economic Projections (SEP) was released, and evaluated that "the dovish content related to pace adjustment in the statement ultimately resulted in a hawkish meeting due to the mention of a possible final rate increase."

For the last meeting of the year, the December FOMC, it is expected that opinions among participants will diverge, unlike the unanimous decision this time.

According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a big step (0.5 percentage point hike) in December reflected in the interest rate futures market rose to 56.8% from 44.5% the previous day. However, since inflation remains high and the Fed’s hawkish stance continues, the possibility of continuing giant steps until December (43.2%) also exceeds 40%.

At the press conference, Powell diagnosed that there is still no clear evidence that inflation is falling decisively and that the labor market is generally overheated. Morgan Stanley said, "(Powell) did not provide clear guidance on the size of the next hike, but (with the hint of pace adjustment) the possibility of a 0.5 percentage point hike has increased," adding, "However, this depends on upcoming economic data."