MNI FED WATCH: Powell Leaves Door To Dec Hike Slightly Ajar

The Federal Reserve held interest rates at a 22-year high on Wednesday and Chair Jerome Powell kept open slightly the possibility of additional monetary tightening.

"We haven't made any decisions about future meetings," Powell said in response to a question about whether financial conditions are sufficiently restrictive to get inflation to 2%. "We have not made a determination and we are not confident at this time we have reached such a stance. We are not confident that we haven't or we have."

Still, Powell said the central bank is very far along in the rate-hiking cycle. He noted Fed staff do not see a recession on the horizon and downplayed the importance of the September Summary of Economic Projections, which had included a median forecast for one more 25 basis point rate increase by the end of the year.

He stressed the need to see persistent change in broader financial conditions to have implications for the path of monetary policy. "With financial conditions we are looking for persistent changes that are material."

"“The questions is should we hike more?” said the Fed chief, also adding the FOMC is not thinking about rate cuts right now. "We are going meeting by meeting." Risks are becoming more two-sided, he said.

VERY POSITIVE REBALANCING

Powell struck a positive note on the labor market. "What we have seen is a very positive rebalancing of supply and demand, partly through just much more supply coming online," he said, also anticipating further progress on inflation to be bumpy.

"If you look at the broad range of wages, wage increases have really come down significantly over the course of the last 18 months, to a level where they are substantially closer to that level that would be consistent with 2% inflation over time. We can proceed carefully at this time," he said.

But the Fed chair noted strong growth could push the Fed to tighten more. "We are attentive to recent data showing the resilience of economic growth and demand for labor," Powell said. "Evidence of growth persistently above potential, or the tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy."

Powell also suggested potential growth is at least temporarily elevated above roughly 2% trend growth so that "catch-up" growth is not using up slack. "That means you could be growing at 2% this year and still be growing below the increase in the potential output of the economy," he said.

The market is pricing in a 20% chance of a hike from the Fed in December, according to CME FedWatch Tool. Projected rate hikes into early 2024 stepped down after Powell's press conference and the market is now pricing in 90 basis points of cuts to the end of next year. (See: MNI: Yield Spike Cuts Chance Of Fed Dec Hike, Q1 Still In Play)

QUANTITATIVE TIGHTENING

The FOMC is also not considering any changes to the pace of the program that sees up to USD95 billion in Treasuries and mortgage-backed securities roll off the central bank's balance sheet each month, Powell said.

"That is not something we are considering," he said. "At USD3.3 trillion in reserves, it is hard to make a case that reserves are even close to scarce at this point. It is not something we are looking at right now.” (See: MNI INTERVIEW: Reserve Scarcity Yet To Materialize - Fed Econ)

Powell said a decision whether to extend the Fed's Bank Term Funding Program will be made in the first quarter of next year. The program that has seen roughly USD110 billion in usage is currently set to end in mid-March.