EconoFACTS

October 19, 2023 | 13:13

Powell Hits All the Right Notes

Economist

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Jay Powell, speaking at the Economic Club of New York this afternoon, hit all the right notes for investors. Short-term Treasury bond yield declines accelerated in the aftermath of the speech. The probability of a November 1^st rate hike from the FOMC fell to 3.6% in the Fed Funds futures market, while the probability of a December rate hike slipped to 28%. While not breaking a lot of new ground, his comments hint at a pause in November, but they also leave the door open for another rate hike at some point should growth and inflation fail to moderate. He said the policy-setting committee is “proceeding carefully”, and that “significant tightening" in financial conditions, largely caused by higher bond yields, "can have implications for policy.” A nod to the sharp rise in long-term Treasury yields may be doing the work for the Fed, so less of a need to hike again. He adds, “there may still be meaningful tightening in the pipeline” and the policy stance is “restrictive”.

He also reiterated that the extent of additional policy firming and how long to keep policy restrictive will “depend on data, outlook, and balance of risks”. He believes the "return to 2% inflation ...is likely to require a period of below-trend growth and some further softening of labor market conditions.”

At the same time, he noted the recent resilience in economic growth, retail sales, and labor demand, and that the September inflation data were “somewhat less encouraging” and “inflation still too high”. "Additional evidence of persistently above-trend growth, or that 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."

Bottom Line: The Powell speech, while keeping his options open, did little to change our view that the Fed will pause their rate hikes again at the upcoming Oct 31-Nov. 1 FOMC Meeting. They still believe the economy will slow despite a surprisingly strong third quarter. With Fed policy now firmly in restrictive territory, a strong case can be made to take a wait-and-see approach, until we get more clarity on the economic and inflation outlook.