Powell Warns of Inflation Risks, Dashing Hopes for Dovish U-TurnPowellWarnsofInflationRisks,DashingHopesforDovishU-Turn

The Federal Reserve hinted that it could soon slow the pace of its interest rate hikes, though chairman Jerome Powell warned that rates will likely need to go higher than previously expected as the central bank mounts an aggressive campaign against inflation. The Fed unveiled its fourth consecutive rate increase of 75 basis points on Wednesday – its sixth hike this year overall – in response to consumer price inflation that has held near 40-year highs. In a statement, the Fed reiterated that it anticipates further rate increases to bring inflation under control but added that it will consider a range of factors, including the lagging impact of rate decisions on inflation and economic activity, to determine the pace of future hikes. Investors welcomed this sentiment, taking it as a clue that policymakers will consider a smaller rate hike in December. 

However, Fed officials will have an additional two months’ worth of economic data to parse, including the October jobs report due on Friday, before they meet again. If the labor market remains resilient and inflation holds strong, the Fed could feel emboldened to maintain its existing cadence of policy tightening. Powell noted that policymakers “have some ground to cover with interest rates” given how “there’s no sense that inflation is coming down.” Also dashing the market’s hopes for an about-face, Powell called it “very premature” to think about pausing the current rate-hike cycle and emphasized the risk of doing too little in the battle against inflation. “If we don’t get inflation under control because we don’t tighten enough, now we’re in a situation where inflation will become entrenched,” he said. In a post on The Bond Blog, PGIM Fixed Income explains how Powell delivered a hawkish encore to a dovish policy statement.