Federal Reserve Chair Jerome Powell opened a new phase in his campaign to regain control of inflation, saying U.S. interest rates will go higher than earlier projected, but the path may soon involve smaller hikes.
Addressing reporters Wednesday after the Fed raised rates by 75 basis points for the fourth time in a row, Powell said "incoming data since our last meeting suggests that ultimate level of interest rates will be higher than previously expected."
Powell said is it would be appropriate to slow the pace of increases "as soon as the next meeting or the one after that. No decision has been made," he said, while stressing that "we still have some ways" before rates were tight enough.
"It is very premature to be thinking about pausing," he said.
The Federal Open Market Committee said that "ongoing increases" will still likely be needed to bring rates to a level that are "sufficiently restrictive to return inflation to 2% over time," in fresh language added to their statement after a two-day meeting in Washington.
The Fed's unanimous decision lifted the target for the benchmark federal funds rate to a range of 3.75% to 4%, its highest level since 2008.
"Slower for longer," declared JP Morgan Chase & Co, chief US economist Michael Feroli in a note to clients. "The Fed opened the door to dialing down the size of the next hike but did so without easing up financial conditions."
Market Reactions
Financial markets whipsawed on Powell's message, which mixed a hawkish tilt toward higher rates with a dovish nod to a possible near-term downshift.
Initially stocks rallied and Treasury yields tumbled with the dollar on the statement, which hinted rate hikes were entering their final phase. Then, as Powell talked about a higher peak rate and said the Fed had a "ways to go" on tightening, yields and the dollar surged and stocks slipped.
The S&P 500 suffered its worst rout on a Fed decision day since January 2021.
Officials, fighting to curb inflation running near a 40-year high, gathered days before midterm U.S. congressional elections in which anger over price pressures has been a dominant theme.
The outcome of the Nov. 8 vote could cost President Joe Biden's Democrats control of Congress, and some prominent lawmakers in his party have started to publicly urge the Fed to show restraint. Powell, for his part, has tried to keep the central bank out of the political fray.
Officials, as expected, said they will continue to reduce their holdings of Treasuries and mortgage-backed securities as planned — a pace amounting to about $1.1 trillion a year.
