Dove or Hawk? Fed Chair Jerome Powell Bracing America for ‘Ongoing’ Rate Hikes

Andrew Moran
By Andrew Moran
February 1, 2023Business News

The Federal Reserve raised interest rates by 25 basis points, lifting the target rate to a more than 15-year-high of 4.50–4.75 percent.

While investors had anticipated a quarter-point jump to the benchmark federal funds rate, financial markets had added to their losses when the Federal Open Market Committee (FOMC) statement revealed “ongoing” rate hikes and “future increases.” But the negative sentiment quickly turned positive during Fed Chair Jerome Powell’s post-FOMC news conference, igniting a late-day rally on Wall Street and erasing its losses.

Powell had reiterated in his opening remarks that the rate-setting committee anticipates “ongoing increases” to “attain a stance of monetary policy that is sufficiently restrictive.” This, Powell noted, would help the central bank resuscitate price stability and return to its inflation target of 2 percent over time.

At the same time, Powell purported that it is “certainly possible” for the fed funds rate to stay below 5 percent, adding that it is possible to achieve its inflation goal “without a really significant downturn or a really significant increase in unemployment.”

“We can now say, I think, for the first time that the disinflationary process has started,” he said.” We can see that and we see it really in goods prices so far.”

However, according to the head of the U.S. central bank, it would be “premature to declare victory.” He alluded to the core Personal Consumption Expenditure (PCE) Services ex-Housing metric that has yet to experience disinflation, further noting that he anticipates higher inflation in housing services.

“We’ve raised rates four and a half percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive,” Powell stated. “Why do we think that’s probably necessary? We think because inflation is still running very hot.”

The Fed will hold its next meeting later next month. Most investors expect another quarter-point rate hike.

Doves or Hawks?

Despite expectations of additional rate hikes and tighter monetary policy this year, some market experts still think the Fed will hit the pause button in spring.

“Like a small dog sounding like a wolf, the Fed raised rates a meager quarter of a percent sounding hawkish about more rate increases to come,” said Bryce Doty, the senior vice president and senior portfolio manager at Sit Fix Income Advisors, in a note. “Given sharply slowing core CPI, we only expect one more quarter increase in March before putting rate increases on hold in May. By May, most inflation indicators will be running at three-month annualized rates below 3 percent.”

The increase of 25 basis points was not entirely surprising as markets had been pricing this in for weeks, says Jan Szilagyi, the CEO of investment firm Toggle AI.

Fed officials have insisted that there would be no cuts this year. But, according to Szilagyi, the key question is now: Was this the last hike?

“The tease in that same Fed media communication was the suggestion of a ‘pause’ that could happen as soon as this spring,” he said. “That could herald the end of the tightening cycle, and a betting race for the start of the easing cycle.”

Whatever the case may be, some lawmakers in Washington are confident that Powell will get control of inflation.

“Jay Powell is as serious as an aneurysm about stopping inflation,” Sen. John Kennedy (R-La.) told NTD. “He is going to continue to raise rates until he thinks he has inflation under control.”

Other representatives on Capitol Hill purport that Congress must do its part, too. This includes reining in spending to tame inflation.

“I do know that what we need to do is rein in federal spending. We’ve never had a revenue problem in D.C. We have a spending problem,” Rep. Pat Fallon (R-Texas) told NTD, adding that “you always hope for the best and prepare for the worst” when it comes to the idea of the Fed engineering a soft landing.

The U.S. government is projected to spend more than $6 trillion in fiscal year 2023, representing the fourth consecutive year of $6 trillion-plus spending efforts. According to the Congressional Budget Office (CBO), the annual budget deficit would average $1.6 trillion from 2023 to 2032 as outlays are predicted to average 23 percent of GDP over this span.

Looking ahead, Powell acknowledged that two more employment and Consumer Price Index (CPI) reports would be released before the March policy meeting.

The January non-farm payroll (NFP) report, which will be released on Friday, is expected to show 185,000 new jobs. In addition, the January annual inflation rate—published on Feb. 14—is projected to dip to 6.4 percent, according to the Cleveland Fed Bank Nowcast.

He added that the first-quarter Employment Cost Index (ECI) will be another critical report that comes out after the March FOMC meeting. The fourth-quarter ECI rose 1 percent in the fourth quarter (pdf), below the market estimate of 1.1 percent. It was also the third consecutive quarterly slowdown. However, on a year-over-year basis, compensation costs jumped to 5.1 percent in the October-to-December span, up from 5 percent in the previous three-month period.

NTD reporter Melina Wisecup contributed to this report.

From The Epoch Times

ntd newsletter icon
Sign up for NTD Daily
What you need to know, summarized in one email.
Stay informed with accurate news you can trust.
By registering for the newsletter, you agree to the Privacy Policy.