He warns that monetary policy is likely to remain tight for a while.
Washington (CNBC) –Jerome Powell, the head of the Federal Reserve, has said that interest rate hikes will likely be smaller in the future, even though he thinks progress in the fight against inflation has been mostly inadequate.
Powell said that the central bank could cut the size of rate hikes as soon as next month. This is similar to what other central bank officials have said recently and what was said at the November Fed meeting.
But he warned that monetary policy is likely to stay tight for a while, until there are real signs that inflation is going down.
Related: Analysis: After Powell’s speech, the markets sigh with relief, but more turbulence is sure to come.
Powell said at the Brookings Institution that, despite some good signs, there is still a long way to go before prices are stable again.
The Fed chairman said that policy changes like raising interest rates and selling off some of the Fed’s bonds take time to work their way through the system.
“It makes sense, then, to slow down the rate of rate hikes as we get closer to the level of restraint that will be enough to bring down inflation,” he said. “The December meeting might be the right time to slow down the pace of rate hikes.”
After Powell’s speech, the chance of a half-point change went up to 77%.
What we don’t know yet is what the Fed will do next.
Powell’s speech made the markets more dovish. The top rate is expected to be just under 5% by May 2023, and people are betting that the Fed will cut a half point by the end of the year.
Powell’s warning that restrictive policy would stay in place until inflation showed more consistent signs of going down was countered by the likelihood of rate cuts.
Powell said, “Given how far we’ve come in tightening policy, the timing of that change is much less important than how much more we’ll have to raise rates to control inflation and how long we’ll have to keep policy at a restrictive level.”
“It’s likely that keeping policy tight for a while will be needed to get prices back to where they should be.” “History strongly warns against loosening rules too soon,” he added. “We’ll keep doing what we’re doing until the job is done.”
Related: Before Powell’s speech, the dollar is about to have its worst month since 2010.
Powell’s comments come at a time when inflation is going down and the labour market is getting less tight.
