Fed chair hints smaller rate hikes may start later this month

ISTANBUL

Federal Reserve Chair Jerome Powell hinted that smaller interest rate hikes could start later this month as the US central bank has been undertaking aggressive monetary tightening to fight inflation.

"Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt," Powell said Wednesday during a speech at the Brookings Institution in Washington, D.C. "Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down."

The Fed has raised its benchmark interest rate by 375 basis points, or 3.75%, since March to get control of record inflation. The central bank raised interest rates by 75 basis points Nov. 2 for a fourth consecutive time, raising the target range for the federal funds rate to between 3.75% and 4% -- its highest since January 2008.

For the next meeting on Dec. 13 - 14, the probability of raising rates by 50 basis points stood at more than 79% on Thursday, according to the FedWatch Tool provided by US-based global markets company the Chicago Mercantile Exchange Group. The probability of a rate hike of 75 basis points was less than 21% because of Powell's comments.

The Fed's tightening cycle has lowered inflation in the US but it is still far from the bank's 2% goal. Annual consumer inflation came in at 7.7% in October, easing from the 8.2% annual gain in September. Annual producer inflation rose 8% in October, slowing from September's 8.4% gain year-on-year.

Powell also signaled that monetary policy will remain restrictive for some time until inflation shows a significant decline.

"Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation,” he said. “It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

Powell's comments were welcomed by Wall Street as the Dow was up 2.2% at the closing bell Wednesday. The S&P 500 added 3.1% and the tech-heavy Nasdaq soared 4.4%.