U.S. Federal Reserve Chair Jerome Powell holds a press conference after the release of the Fed policy decision to leave interest rates unchanged, at the Federal Reserve in Washington, D.C., on Sept. 20, 2023.
Evelyn Hockstein | Reuters
Federal Reserve Chair Jerome Powell is set to deliver a crucial policy address on Thursday. His task is to persuade the markets that the central bank is committed to tackling inflation with reduced force.
Powell will speak at the Economic Club of New York at noon ET, at a critical juncture for the U.S. economy.
Although inflation numbers have shown improvement, there has been a surge in Treasury yields, causing conflicting signals about the direction of monetary policy. While the market largely expects the Fed to maintain rates, investors will look to Powell for confirmation and clarity on the Fed’s view of current conditions and long-term trends.
“Powell always tends to emphasize the need to stay vigilant, and for understandable reasons,” said Luke Tilley, chief economist at Wilmington Trust. “I expect him to discuss the strength of the economy and the surprising consumer strength in the third quarter as a risk for inflation. He has enough ammunition to maintain the narrative of staying vigilant.”
Tilley believes Powell’s message will revolve around three key points: the need for a quick rate increase, finding the peak level (which is currently debated), and determining how long rates should remain high to bring inflation back to the 2% target.
“Their ultimate goal is to tighten financial conditions to reduce inflation,” Tilley said. “He will use this framework, even if he adopts a dovish stance for the next Fed rate decision in November or December, to shift the focus to the third question of how long rates should stay high.”
“Higher for longer” has become an unofficial mantra recently, as Philadelphia Fed President Patrick Harker expressed his stance on policy.
Harker, along with other Fed officials such as governors Philip Jefferson and Christopher Waller, has advocated for holding off on rate hikes to assess incoming data. Waller stated that the Fed can “wait, watch, and see” before making any moves on rates.
Powell is expected to echo this sentiment on Thursday, while also emphasizing the need to remain vigilant in the fight against inflation.
“Powell needs to present himself to investors as a neutral leader, allowing others to be more aggressive,” said Jeffrey Roach, chief economist for LPL Financial. “They won’t declare victory, and that’s why Powell will continue to maintain a somewhat hawkish tone.”
New York Fed President John Williams hinted at a continued “restrictive stance of policy” to combat inflation, according to a Reuters report.
Like other speakers, Powell will likely stress the Fed’s focus on data-dependency, following a more aggressive path in raising the benchmark borrowing rate. The Fed chose not to raise rates in September.
Investors will also look to Powell for guidance on rising yields, especially with the 10-year Treasury reaching its highest point in 16 years.
“Powell will reiterate that the data has been stronger than expected, but there has also been a significant increase in yields, which has tightened financial conditions. Therefore, there is no urgency for a policy response in November, and the Fed can take a wait-and-see approach,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.
Guha believes that a Fed on hold now is only the beginning of future rate cuts in 2024 as inflation and economic growth both weaken.
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