MNI FED WATCH: Powell Nods To Slower Hikes, Higher Rate Peak

The Federal Reserve opened the door to slowing its torrid pace of interest-rate increases Wednesday but also indicated it will raise them more than previously anticipated and perhaps keep them there longer.

The time to slow rate hikes “is coming and it may come as soon as the next meeting or the one after that,” Chair Jerome Powell told reporters after hiking 75bps, the fourth consecutive move of that magnitude.

The Fed had penciled in a median peak rate of 4.6% at the September meeting but ex-officials have told MNI rates will likely peak at 5% or higher. Powell pushed back against the idea the Fed will soon stop raising rates and potentially reverse course.

"We still have some ways to go. Incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected," Powell said. “It is very premature to be thinking about pausing our rate hikes.”

MIND THE LAGS

Markets had a see-saw reaction, with stocks briefly rallying and Treasury yields falling and then both markets reversing course as the Chair's press conference was viewed hawkishly. The Dow Jones industrial average closed the session just over 500 points lower.

The central bank also added new guidance hinting at less dramatic increases in the fed funds rate, now in a range of 3.75% to 4%.

"The Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments," the FOMC said. "Ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2%."

U.S. inflation has shown little sign of retreating in the face Fed rate hikes while the job market, which the Fed would like to cool in order to slow demand, continues to post robust employment gains. The jobless rate is at 50-year low of 3.5% and Wall Street analysts expect employers added 196,000 jobs last month, slowing from 263,000 in September but still a solid gain.

NO OBVIOUS SOFTENING

"We keep looking for signs that the beginning of a gradual softening is happening. Maybe that's there but it's not obvious to me," Powell said. "Wages are not coming down, they're just moving sideways at an elevated level." Vacancies are below their all-time high but "not by as much as we thought," he added.

The Fed's preferred inflation measure jumped 6.2% in the year to September while core PCE rose 5.1%, well above target.

“We do need to see inflation coming down decisively and good evidence of that would be a series of lower monthly readings,” Powell said. “We may ultimately move to higher levels than we thought at the September meeting."