U.S. Fed Maintains Hawkish Stance Amid Inflation Uncertainty: Powell Signals Potential for Further Rate Hikes

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U.S. Federal Reserve Chair Jerome Powell asserted the central bank's readiness to implement additional interest rate hikes, should the economic landscape demand it. Addressing a conference in Washington, Powell emphasized the commitment to attaining the long-term inflation target of two percent, signaling a willingness to take further policy-tightening measures if deemed appropriate.

Powell acknowledged the inherent challenges in reaching the inflation goal, stating, "We know that ongoing progress toward our two percent goal is not assured: Inflation has given us a few head fakes." The Fed Chair's remarks were briefly interrupted by climate protesters, underscoring the contentious backdrop against which central banks are navigating their policy decisions.

The recent pronouncement by Powell follows the Federal Reserve's decision, just over a week ago, to maintain interest rates at a 22-year high for the second consecutive meeting. This move had initially fueled expectations that the central bank might be concluding its current rate-hiking cycle.

Despite the Federal Reserve's steadfast commitment to achieving a sufficiently tight monetary policy stance, Powell expressed a lack of confidence in having reached such a position. "We are not confident that we have achieved such a stance," he asserted, emphasizing the committee's dedication to securing a robust monetary policy.

Powell's commentary highlighted lingering concerns within the central bank about the potential resurgence of inflation. Although inflation has moderated significantly since its peak last year, Powell indicated that the Fed remains vigilant and is closely monitoring its impact on the economy. He suggested that the current monetary policy might be "significantly restrictive," reflecting a degree of confidence in the Fed's stance.

In the face of robust economic growth and a resilient labor market, the central bank's aggressive monetary tightening, which brought interest rates to a range between 5.25-5.50 percent, has not hampered the overall economic momentum. However, recent signals of a slowdown in the labor market have emerged.

The positive economic data has bolstered the probability of a "soft landing," a scenario in which the Fed successfully curbs inflation without pushing the United States into a recession.

Uncertainty Looms Over December Rate Hike

As the year draws to a close, uncertainty surrounds the possibility of a December rate hike. While the majority of Fed policymakers indicated in September that they anticipated one more interest rate increase in 2023, some have since hinted that the central bank might have concluded its tightening cycle.

Philadelphia Fed President Patrick Harker cautioned against expecting a near-term decrease in the policy rate, stating, "While I see us on the path of taming inflation and protecting our economic underpinnings, I would also caution that a decrease in the policy rate is not something that is likely to happen in the short term."

However, the views within the rate-setting Federal Open Market Committee diverge. Fed Governor Michelle Bowman expressed her expectation of further rate hikes to bring inflation down to the two percent target in a timely manner. She highlighted the persistent risk of core services inflation and emphasized the need for a cautious approach.

Powell, speaking at the International Monetary Fund conference on Thursday, indicated that the Fed would proceed cautiously, considering the risk of misinterpretation of short-term data trends and the danger of overly tightening monetary policy.

Currently, futures traders are assigning a probability of more than 88 percent that the Fed will opt to maintain interest rates at the upcoming December meeting, according to data from CME Group.

In a subtle acknowledgment of recent disruptions caused by climate protesters, Powell asserted that policy decisions on issues like climate change should rest with elected politicians rather than the independent central bank. While the Fed has taken some steps to address climate change, Powell reiterated that the role of a "climate policymaker" should be played by the elected branches of government.

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