Powell: Proceed with caution, not confident that policy tightening is sufficient, will not hesitate to raise interest rates when necessary.

Early Friday morning Beijing time, Federal Reserve Chairman Jerome Powell attended an event at the International Monetary Fund (IMF).

Powell stated that the Federal Open Market Committee (FOMC) is committed to achieving a fully restrictive monetary policy stance in order to gradually bring the inflation rate down to 2% over time. However, he expressed uncertainty about whether enough measures have been taken to maintain this momentum, and he believes there is still a long way to go to reach the target inflation rate. Powell pointed out that inflation is still far higher than the level the Fed would like to see.

Similar to his recent speeches, Powell emphasized that the Fed can still afford to be cautious as the risks between taking too much action and too little action have become more balanced. He stated that if further tightening of policy is appropriate, the Fed will not hesitate to do so. However, they will continue to proceed with caution to address the risks of being misled by several months of good data and the risks of excessive tightening.

Powell mentioned the progress made by the U.S. economy. He noted that the annualized GDP growth rate for the third quarter was quite strong at 4.9%. However, he expects economic growth to slow down in the coming quarters. The unemployment rate is still low, but it has risen by half a percentage point this year, which is usually associated with an economic recession.

Powell cautiously believes that stronger-than-expected economic growth could weaken the Fed's efforts to combat inflation and may require a response from monetary policy.

He also pointed out that improvements in the supply chain help alleviate inflationary pressures, but it is currently unclear how much more supply-side improvements can achieve. Looking ahead, a significant portion of the progress in reducing inflation may need to come from a contractionary monetary policy that restrains overall demand growth.

After announcing a thorough review in 2020, Powell also stated that the Fed will conduct another review of its policy framework starting in 2024, with the results of the new review to be announced in 2025. Powell said, "One of the questions we will consider is the extent to which the structural features of the economy that led to low interest rates before the COVID-19 pandemic will persist. Over time, we will continue to learn from the experience of the past few years and its impact on monetary policy."

Nick Timiraos, a well-known financial journalist known as the "New Fed News Agency," wrote that Powell remains cautious about raising interest rates or announcing the end of rate hikes. His speech provided little additional reason for another rate hike, but he added that "we are not confident" that the tightening of policy has been sufficient to lower inflation.

Powell stated that if appropriate, the Fed will not hesitate to raise interest rates. After his remarks, the U.S. dollar and U.S. bond yields rose, while U.S. stocks extended their losses.

• The two-year U.S. Treasury yield rose by 5.89 basis points in the short term, hitting a daily high of 5.0160%.
• The S&P 500 index fell more than 0.6%, the Dow Jones Industrial Average fell 190 points, a decline of over 0.5%, the Nasdaq Composite Index fell more than 0.6%, and the Russell 2000 Index fell 0.9%. Subsequently, the decline in US stocks continued to expand, with the Nasdaq falling more than 1%.
• The market still generally believes that the Federal Reserve has completed the entire interest rate hike process, and the probability of a final rate hike at the December meeting is less than 10%.
• The time expectation for the first 25 basis point rate cut by the Federal Reserve, as indicated by swap contracts, has been pushed back one month from June 2024.

It is worth mentioning that Powell's speech was interrupted for a while by several climate change protesters who broke in. They waved banners, shouted slogans, and spoke loudly for about five minutes before leaving. Powell briefly left the podium and then continued his speech. This is similar to what happened during his public speech in October, when a group of environmental activists chanting "Stop financing fossil fuels" stormed into the New York Economic Club venue where Powell was speaking, interrupting his opening remarks.

The Federal Reserve kept interest rates unchanged at its meeting in early November. In the press conference after the FOMC meeting, Powell stated that the Federal Reserve is nearing the end of rate hikes, acting cautiously and considering whether further rate hikes are necessary. Monetary policy is restrictive, but it is not certain if the restrictions are sufficient. Even if there is no rate hike in December, it does not necessarily mean the end of the rate hike cycle, and a rate cut is not being considered. Federal Reserve staff did not include a recession in their economic forecasts, and further economic slowdown may be needed for inflation to decline.