WASHINGTON, Nov 1 (Reuters) – The Federal Reserve kept interest rates steady on Wednesday as policymakers struggled to decide whether fiscal conditions were tight enough to control inflation or whether an economy that was performing beyond expectations needed more control.
Federal Reserve Chairman Jerome Powell said the situation remains a puzzle, as U.S. central bank officials are poised to raise rates again if inflation levels pick up and are wary that market-based interest rates will begin to weigh significantly on the economy. , and trying not to over-disrupt demand, the current dynamics of sustainable job and wage growth.
In a press conference after the conclusion of the two-day policy meeting, Powell said that given the uncertainties, the best course of action would be to keep the central bank’s benchmark overnight interest rate in the current range of 5.25%-5.50%. How jobs and price data develop between now and the next policy meeting in December
After 20 months of aggressively tightening monetary policy, Powell said it was unclear whether overall financial conditions were still tight enough to contain inflation, which he sees as well above the central bank’s 2% target.
“We’re not confident we haven’t, we’re confident we haven’t,” Powell told reporters that we’ve reached a plateau of sufficient regulation. “Inflation is decelerating, but it’s still running above our 2% target… A few months of good data is just the start to build confidence.”
Annual inflation, based on the central bank’s preferred measure, was 3.4% in September for the third month in a row. Excluding volatile food and energy costs, it was 3.7% from August.
Asked if the Fed was biased toward holding off on policy versus raising rates, Powell replied “That’s the question we’re asking. Should we raise more?”
Market rates at the center
But the Fed chief also acknowledged that recent market-driven increases in Treasury yields, home mortgage rates and other financial costs could have their own impact on the economy as long as they last. The central bank should consider raising the policy rate again.
“These higher Treasury yields indicate higher borrowing costs for households and businesses. Those higher costs are going to weigh on economic activity for as long as this tightening lasts,” Powell said, specifically referring to 30-year fixed-rate home mortgages. That’s close to 8%, a near 25-year high.
[1/7]Federal Reserve Board Chairman Jerome Powell holds a news conference following the closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve Bank in Washington, Nov. 1, 2023. REUTERS/Kevin Lamarque Get license rights
Powell’s comments, which detailed the policy decision and report, left the central bank’s benchmark rate unchanged for a second consecutive meeting and took what he called a “tremendous” 4.9% annual pace of US economic growth in the July-September period. A rise in consumer spending.
“Economic activity expanded at a strong pace in the third quarter,” the U.S. Federal Reserve said in its report after policymakers unanimously agreed to keep rates unchanged. The language marked the Fed’s upgrade to a “firm pace” at its September meeting.
U.S. stocks rose after the policy report and ended the day higher, while the U.S. dollar (.DXY) pared gains and ended flat against a basket of currencies. As U.S. Treasury yields fell and traders of short-term U.S. interest rates raced, the Fed raised its policy rate and will begin cutting rates by June next year.
“The report leans on the wrong side,” said Peter Cardillo, chief market economist at Spartan Capital Securities. If it does, it means the central bank is over.”
While markets thought the central bank’s rate hike campaign was over, data pointing to a stronger-than-expected economy and labor market put the possibility of another hike on the table.
The economy’s recent performance has been constructive, with low unemployment and rising wages spurring greater demand for goods and services and greater job creation—the kind of virtuous cycle that leads to self-sustaining growth within limits.
The issue for the central bank is whether the conditions are too strong for an improvement or reversal in inflation stalls.
“It was great,” Powell said. “In the midst of this we’re seeing improvement in inflation…the question is, how long can that continue?”
The odds are that some sort of slowdown will be required, and the Fed is committed to finding a policy stance to make that happen.
“It’s still possible … we’ll see some slower growth and some softness in the labor market … to fully restore price stability,” Powell said.
His comments focused on upcoming employment and inflation data, the Labor Department’s monthly jobs report released Friday, the first big data to shape the central bank’s deliberations for its December meeting.
Report by Howard Schneider; Editing by Paul Simao
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