Fed Maintains Interest Rates, Powell Cautions on Potential End of Tightening Campaign

By Howard Schneider and Michael S. Derby

WASHINGTON – The Federal Reserve decided to maintain interest rates on Wednesday as officials weighed whether financial conditions are already tight enough to manage inflation, or if the economy’s ongoing strength necessitates further restraint.

Fed Chair Jerome Powell noted that the current economic climate poses a challenge, with central bank officials ready to hike rates again if inflation progress stalls, while also being cautious about how rising market-based interest rates might significantly impact the economy. They are aiming to avoid disrupting the steady job and wage growth being observed.

During a press conference following a two-day policy meeting, Powell indicated that considering the uncertainties, it was best to keep the Fed’s benchmark overnight interest rate in the current range of 5.25%-5.50% until more job and price data emerges before the next meeting in December.

As the Fed’s monetary policy tightening reaches roughly 20 months, Powell stated it is still uncertain whether overall financial conditions are sufficiently restrictive to curb inflation, which remains considerably above the central bank’s 2% target.

"We’re not confident that we haven’t, we’re not confident that we have," Powell told reporters regarding whether they have achieved a restrictive enough plateau. "Inflation has been decreasing but is still running well above our target… Good data over a few months is just the start of what is needed to build confidence."

In September, inflation, based on the Fed’s preferred measure, remained at 3.4% for the third consecutive month. When excluding volatile food and energy costs, it stood at 3.7%, showing little change from August.

When questioned about whether the Fed leans towards increasing rates or maintaining the current policy, Powell replied, "that’s the question we’re asking. Should we hike more?"

MARKET RATES IN FOCUS

Powell also recognized that the recent rise in Treasury bond yields, mortgage rates, and other financing costs could impact the economy, particularly if these conditions prolong. He emphasized monitoring these effects as the Fed decides on potential future rate hikes.

"These higher Treasury yields are translating to increased borrowing costs for households and businesses. These elevated costs will affect economic activity if this tightening persists," Powell stated, specifically referencing the near 8% rates for 30-year fixed mortgages, the highest in 25 years.

Powell’s remarks reflected on a policy decision that left the benchmark rate unchanged for the second consecutive meeting while acknowledging an impressive annual economic growth rate of 4.9% in the third quarter, driven by strong consumer spending.

"Economic activity expanded at a strong pace in the third quarter," the central bank noted in its statement after the unanimous decision to keep rates steady, indicating an upgrade from the "solid pace" recognized in its previous meeting.

Following the policy statement, U.S. stocks rose, the U.S. dollar stabilized, and Treasury yields decreased, with traders betting that the Fed would keep rates unchanged for now and might begin cutting them by June of the following year.

"The statement leans to the dovish side," commented Peter Cardillo, chief market economist at Spartan Capital Securities. "The unchanged rates for two meetings suggest the Fed might remain steady in December, indicating they may be done with increases."

Despite the market’s view that the Fed’s rate-hiking cycle may be complete, robust data on the economy and labor market keeps another hike a possibility.

Powell acknowledged that the current economic performance is positive, with low unemployment and rising wages contributing to increased demand for goods and services and job creation – a cycle that, if maintained, supports continuous growth.

The challenge for the Fed lies in whether conditions remain strong enough to hinder progress on inflation.

"It has been good," Powell commented. "We’ve been making progress on inflation during this period… The question is, how long can that continue?"

He suggested that a slowdown might be necessary for price stability to be fully restored, stressing the Fed’s commitment to finding the right policy stance to achieve this outcome.

Powell’s remarks have brought attention to upcoming employment and inflation data, with the monthly jobs report from the Labor Department set to be the first significant information influencing the Fed’s discussions for December’s meeting.