Chair of the Federal Reserve Jerome Powell has used an address to the International Monetary Fund (IMF) to stress there’s a “long way to go” in the fight to return inflation to the 2 per cent target.
The Fed has lifted the funds rate by a cumulative 525 bps since commencing its tightening cycle in early 2022 but has opted to leave rates on hold following its last two Federal Open Market Committee (FOMC) meetings.
US equities rallied following its latest hold verdict on 1 November as they priced in an end to the tightening cycle with a terminal funds rate of 5.25–5.5 per cent.
However, chair Powell has cooled these expectations, noting labour market conditions “remain tight” and aggregate economic demand remains strong.
“The FOMC is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 per cent over time; we are not confident that we have achieved such a stance,” he said.
“We know that ongoing progress toward our 2 per cent goal is not assured: inflation has given us a few head fakes.
“If it becomes appropriate to tighten policy further, we will not hesitate to do so.”
But the Fed chair went on to temper the hawkish tone, stating the central bank would “move carefully” and assess the flow of data to avoid “overtightening”.
“We are making decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks, determining the extent of additional policy firming that may be appropriate to return inflation to 2 per cent over time,” he added.
“We will keep at it until the job is done.”
According to the latest US data, the consumer price index (CPI) eased to3.7 per cent in the 12 months to 30 September 2023, well below a peak of 9.1 per cent in June 2022.
In the year-to-date, annualised inflation has slipped 2.8 percentage points from 6.5 per cent as at 31 December 2022.
James Knightley, chief international economist, said he expects headline inflation to slow to 3.3 per cent in the next CPI print.
He said the Fed is likely to achieve its inflation objective without further tightening.
“…We are increasingly confident that inflationary pressures will continue to subside and this means that the Federal Reserve will not need to raise interest rates any further,” he said.