November 30, 2022 | 13:56
Powell: Slower But Higher and For Longer
As largely expected, Chair Powell ratified market expectations of a likely 50 bps rate hike on December 14, while underscoring that rates are likely to go higher than the Fed previously thought and remain elevated for a while. Powell said the time to moderate the pace of rate hikes could come as soon as the next meeting given substantial progress in taking policy toward a "sufficiently restrictive" stance and in recognition of the lagged effects of past policy moves. However, he also stuck to his recent script that the terminal policy rate is likely to go "somewhat higher" than the FOMC thought in September (4.50%-4.75% in late 2023) and may need to be held at a restrictive level "for some time", as the Fed has a long way to go to restore price stability.
So, despite one soft CPI print, the Chair hasn't changed his tune since the post-meeting presser of earlier this month. A tight labour market that has shown only "tentative" signs of moderation is clearly in his crosshairs. Until job growth slows more substantially and the unemployment rate kicks higher, don't expect him to ease up on the hawkish rhetoric. Treasuries posted a modest rally with yields down about 4 bps shortly after the release of the speech.
Powell's comments support our call for a 50 bp hike in two weeks and a further 50 bps of increases spread over the first two meetings of next year, taking the policy target range to 4.75%-5.00%. The hawkish skew also supports our view of no rate cuts until 2024.