Powell Confirms Speed Adjustment as Early as December... Draws Line on Rate Hike Pause (Summary)

[Image source=AP Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Jerome Powell, Chairman of the Federal Reserve (Fed), confirmed that the pace of interest rate hikes could slow as early as December. However, he cautioned against premature expectations of a policy pivot, emphasizing that rate hikes will continue. Powell’s remarks, which effectively confirmed a big step (a 0.5 percentage point increase in the benchmark interest rate), triggered a broad rally in the New York stock market.

◆ Powell Opens Up: "Pace Adjustment Possible in December"

Powell stated at the Brookings Institution in Washington DC that "the time to slow the pace of rate hikes could come as early as the December meeting."

He explained, "The Fed raised rates quickly, and it takes time for these moves to impact the economy," adding, "It would be reasonable to slow the pace of rate hikes." This supported the market’s expectation of a slowdown from the unusual four consecutive giant steps (0.75 percentage point hikes) to a big step at the upcoming December Federal Open Market Committee (FOMC) regular meeting. In that case, the US benchmark interest rate would be 4.25?4.5%.

However, Powell reaffirmed the stance that "continuing rate hikes is appropriate," emphasizing that tightening must continue until clear signs of easing inflation appear. He stressed, "There is a long way to go to price stability," and that restrictive levels must be maintained.

Regarding recent signs of slowing inflation in the US, he warned, "A single decline does not mean a permanent drop." He also pointed out that wage growth remains too high to control inflation. He assessed that tightening is unlikely to stop as long as the labor market remains overheated.

Powell said, "Although there has been some progress, the Fed still has a long way to go," and warned, "History strongly cautions against premature easing." He also hinted that the terminal rate could be higher than the dot plot presented in September, which showed a median rate of 4.6% for next year.

These remarks align with Powell’s press conference following the November FOMC. At that time, he left room for a possible slowdown in pace to assess the cumulative effects of monetary tightening, while suggesting the terminal rate could rise further. The market widely interpreted this as signaling an era of a 5% benchmark interest rate.

Additionally, Powell dismissed concerns that the Fed’s aggressive tightening is fueling a strong dollar and impacting the global economy, saying, "It is better for the US and the world economy to control inflation quickly." He praised the Fed’s decision to raise rates by a whopping 3.75 percentage points this year, saying, "I think acting quickly was the right choice." However, he added, "We do not want excessive tightening," expressing hope that a soft landing is still achievable.

◆ Market Rally, Nasdaq Surges Over 4%

The market cheered Powell’s comments on slowing the pace. Awaiting Powell’s speech, the New York stock market started mixed but closed with broad gains. The Nasdaq, sensitive to interest rates and tech-heavy, soared over 4%. The Dow Jones Industrial Average rose 2.18%, and the S&P 500 increased 3.09%. Among individual stocks, tech shares including FANG showed particularly strong gains.

Jeffrey Roach of LPL Financial said, "Most of Powell’s remarks were mild and predictable," and predicted, "The market will show strength in the near term." Greg Vasek, CEO of AXS Investments, evaluated the rally by saying, "Investors are seeking certainty," and "The message that the pace of hikes could slow as early as December was decisive." Some expect this to signal a green light for a Fed pivot next year.

However, Roberto Bagnato of Immobiliare Quadronno S called it a "nonsense rally." He pointed out, "Powell said the pace would slow, but also that rates could be higher than previously expected. The market only wants to hear the first part of Powell’s remarks."

According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently prices in over a 72% chance of a 0.5 percentage point rate hike in December, up from about 66% the previous day.

◆ December Economic Data Key... November Private Employment Halved

Investors are now focusing on December data. Attention is on the employment report to be released on the 2nd. This report, closely watched by the Fed, is considered a more accurate indicator of overall US employment, combining private and public sectors. Economists currently forecast that November nonfarm payrolls will increase by only 200,000, slowing from the previous month. Ahead of the December FOMC meeting, the November Consumer Price Index (CPI) will also be released on the 13th, providing a key gauge to confirm whether US inflation has peaked.

Labor market data released before Powell’s remarks confirmed that private employment is gradually cooling due to the Fed’s aggressive tightening. According to the ADP National Employment Report, US private sector employment increased by 127,000 in November, roughly half the 239,000 increase in October. This is the lowest since January last year and well below the expert forecast of 200,000.

The US Department of Labor’s Job Openings and Labor Turnover Survey (JOLTS) showed that job openings fell by 353,000 to 10.3 million in the previous month, a decrease of 760,000 compared to the same period last year. Additionally, large-scale layoffs continue among big tech companies such as Meta Platforms, Twitter, and Amazon. On the same day, delivery service DoorDash announced it would lay off 1,250 employees. Cryptocurrency exchange Kraken also announced plans to cut 1,100 jobs due to the crypto market slump and the fallout from FTX’s bankruptcy.

The Fed’s latest Beige Book, the final economic report of the year, showed that inflation eased in some regions while economic growth slowed. This report covers the period from mid-October to November 23 across the 12 Federal Reserve Banks’ districts. Economic activity in the US was flat or showed slight expansion, far below the modest growth noted in the previous Beige Book. Five districts recorded slight or modest growth, while the other seven showed no change or slight declines. The Beige Book stated, "Interest rates and inflation continue to weigh on economic activity," and "Many reported increased anxiety and pessimism."