Federal Reserve Chairman Jerome Powell, in his speech at an IMF event today, hinted at possible policy tightening via an interest-rate hike due to persistent high inflation and sustained economic growth. Powell expressed satisfaction with the current inflation reduction efforts but raised concerns over reaching the 2% target with present interest rates. He pledged to hike rates if needed while ensuring caution to avoid data misinterpretation or overtightening.
Powell acknowledged the potential threats from robust Q3 GDP growth and recognized that most supply-chain bottlenecks have been resolved, leaving unclear impacts on inflation. He proposed tighter monetary policy as a vital tool for future inflation control.
Additionally, Powell announced a formal review of the Fed's interest-rate policy for H2 2024, potentially contemplating an increase in the 2% inflation target or converting it into a range. This review will incorporate lessons from the unexpected post-pandemic inflation surge and reevaluate the practice of overlooking supply-side shocks like high oil prices. The potential return to pre-pandemic ultra-low or zero interest rates was also discussed.
In his discussion about potential additional interest rate hikes as countermeasures to inflation, Powell highlighted the uncertainty in achieving the 2% inflation target and the possibility of further policy tightening. He stated that the December policy meeting might witness a singular rate hike. Despite this, a third consecutive pause in rate hikes is anticipated next month, with a 90% probability of steady rates, according to the CME FedWatch Tool.
Powell stressed on preventing economic damage while managing inflation risks. He linked deflation to the correction of pandemic-related supply and demand distortions and suggested that controlling inflation might necessitate restraining aggregate demand growth through tight monetary policy.
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