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The Federal Reserve recently said it may slow the pace of aggressive rate hikes sooner than expected.

The announcement came on Wednesday as Fed Chairman Jerome Powell spoke at an economic forum.

The announcement

Federal Reserve Chairman Jerome Powell delivered fiscal and monetary policy remarks at the Hutchins Center.

It was his last public appearance before the central bank entered a blackout period at its December 13-14 policy meeting.

“The time for moderating the pace of rate increases may come as soon as the December meeting,” said Powell.

“Despite some promising developments, we have a long way to go.”

The Federal Reserve chairman also noted that they had not seen any noticeable progress in the decades-high inflation dragging the economy down.

Rate increases

Meanwhile, investors are looking for signs that the Fed is slowing or halting its aggressive rate hikes.

Recently, the Federal Reserve has increased its rhetoric to spread the message that more needs to be done.

Additionally, officials will continue to raise interest rates until inflation shows signs of slowing.

This time, however, the rate increases will be lower than before.

Stock market

James Bullard, president of the St. Louis Federal Reserve, warned this week that the stock market underestimates the risk of an aggressive Fed.

Meanwhile, John Williams, president of the New York Federal Reserve, said inflation remains the foremost economic concern worldwide.

Williams called underlying inflation in the services sector the most challenging aspect of the battle.

Read also: Federal Reserve continues with another rate hike

Actions

The Fed raised interest rates six times in 2022 for the following reasons:

• Discouraging borrowing
• Cooling the economy
• Bringing down the high inflation that peaked at 9.1% over the summer

Since then, the latest consumer price index showed a drop in inflation to 7.7%.

Employment

Despite aggressive measures, the labor landscape has proven to be sustainable.

The economy has regained the jobs lost after millions were out of work at the start of the pandemic.

In recent months, hundreds of thousands of jobs have been added to the labor market.

Moreover, the market has maintained a low unemployment rate at nearly half a century.

While workers may have good news, the labor market puts the Fed in a difficult position.

A staff shortage means employees can charge their prices, adding to inflationary pressures.

A recent Job Vacancies and Labor Turnover survey showed on Wednesday that nearly 1.7 vacancies were available to job seekers in October.

According to Powell, the decline in job postings is a positive sign.

However, he noted that although the relationship between job vacancies and unemployment is strained, he and other Fed officials believe the labor market could regain equilibrium as job vacancies decline.

“We’ve seen that so far, but it’s way too early,” said Powell.

Corrections

The Federal Reserve is tackling a supply-side inflation problem with blunt tools.

Demand for goods in the United States soared last summer as consumers emerged from days of shutdowns and layoffs.

However, the recovery of the global supply chain is taking longer, leading to bottlenecks, goods shortages, and price hikes.

The Federal Reserve has resisted calls to deal with runaway inflation, calling them “transitory.”

Moreover, the Fed kept interest rates at historically low levels because it did not want to risk a resumption of economic growth.

As demand rises, inflation has become the central bank’s primary concern.

In March, the Federal Reserve launched a rapid corrective course with the following actions:

• Hiking its benchmark lending rate by a quarter of a point
• Hiking lending rate by half a point
• Rolling out four consecutive massive three-quarter-point hikes

However, the measures have not yet succeeded in curbing inflation in the United States.

Instead, rate hikes could possibly do more harm than good.

Read also: Signs of inflation collapse could prompt Federal Reserve to cease interest rate hike

New approach

The Federal Reserve currently employs a new model of sustained, smaller rate hikes over an extended period.

They believe the approach will result in a soft landing that will keep inflation in check while avoiding a recession or major layoffs.

“I do continue to believe that there’s a path to a soft or softish landing,” said Jerome Powell.

“I think it’s still achievable.”

“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,” he added.

“We will stay the course until the job is done.”

Reference:

Small rate hikes are likely coming in December, says Fed Chair Powell