Fed Chair Powell signals 0.50% rate hike in December

Yahoo Finance’s Jennifer Schonberger joins the Live show to discuss October core PCE data, Fed Chair Powell’s speech on Wednesday, and the expectations for the upcoming FOMC meeting.

Video transcript

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JULIE HYMAN: Something else that we have to keep in mind is the big picture here in the US. We got some economic data today. Core Personal Consumption Expenditures, PCE-- that's the key indicator for inflation that the Fed watches-- up 0.2% in October, below the Street's estimates of 0.3%. And this data, of course, comes after Federal Reserve Chair Jay Powell signaled that the central bank is prepared to slow its pace of interest rate hikes as it works to fight inflation.

Yahoo Finance's Jennifer Schonberger here with all the details. Jen, it was so fascinating to see the market reaction yesterday. Maybe people worried that he was going to be more hawkish, but he didn't really say anything that new.

JENNIFER SCHONBERGER: Good morning, Julie. I think there was probably a fear that he could say something more hawkish. Rather, he reiterated what he had said. And that inflation data that we just got this morning, the decrease in core PCE month over month certainly sets the table for a slowdown in the pace of rate hikes.

And Wednesday, Fed Chair Powell did just that, setting the table for a 50-basis-point rate hike for the December policy meeting, saying in his speech at the Brookings Institution that it makes sense to slow down the pace of rate hikes as the Fed approaches the peak level on its benchmark interest rate. And that time could come as soon as the December meeting. Take a listen.

JEROME POWELL: After our November meeting, we noted that we anticipated that ongoing rate increases will be appropriate in order to attain a policy stance that is sufficiently restrictive to move inflation down to 2% over time.

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. 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 time for moderating the pace of rate increases may come as soon as the December meeting.

JENNIFER SCHONBERGER: Powell says it's prudent to slow down the pace of rate hikes, given that it takes time for monetary policy to filter through the economy. He also argued that slowing down rate hikes and holding rates higher for longer is a form of risk management to guard against raising rates too high and causing a recession, though he cautioned against loosening policy too early and said, cutting rates is not something we want to do soon. That's why we're slowing down.

Now, Fed Chair Powell remarked that core PCE was trending around 5% yesterday, which we just learned is where year-over-year PCE stands for October, and he said then that inflation remains, quote, "far too high", noting that while data in October pointing to that CPI number showed a decline, it was only a single month's data.

Powell says he thinks that the Fed will likely need to raise rates somewhat higher than what was projected in September, though the ultimate level of that remains highly uncertain right now. Julie.

JULIE HYMAN: Yes, and that is something people are talking a lot about as well, the terminal rate. Thanks so much, Jen. Appreciate it. And let's talk a little bit more about the Fed and the reaction we saw yesterday because indeed it was interesting to see this big enthusiasm in the wake of his commentary. You know, most of the investors we've spoken to have said they're not going to go 70-- they likely wouldn't do 75 basis points again in December. They were already pricing in a slowdown.

BRAD SMITH: Right, and I think it was interesting how he kind of still tempered some of either the pause or the pivot narrative towards the end of his speech by saying, it's likely that restoring price stability will requiring-- will require holding policy at a restrictive level for some time. History cautions against, strongly against prematurely loosening policy.

So that should take off the table, and I think markets will read through this a little bit more on the day and perhaps really appreciate those words specifically and how he said that they're going to stay the course until the job is done. But prematurely loosening policy, to me at least, takes off the table any type of cut coming forward in 2023.

JULIE HYMAN: But he also said we don't want to be so aggressive that we're then going to need to cut.

BRAD SMITH: Sure.

JULIE HYMAN: That was sort of the message as well. He also talked about that he does think and is hoping for a soft landing, right, for the US economy, which is something that there's been a lot of skepticism about. Of course, there's also, what does a soft landing mean?

BRAD SMITH: Right.

JULIE HYMAN: Does it mean a recession but not a particularly acute one? Does it mean avoiding a recession? So I think you could kind of parse that out as well.

BRAD SMITH: Right. And that's going to feel a lot different for people who have already either lost jobs, people who are already feeling the larger impacts of some inflation. Even that is sticky in the necessities categories, as we continue to talk about. So as that continues to loosen at least a little bit and meet some of the Fed's mandates, especially on the price stability front, we'll see exactly where the economy stands at that point in time too.

JULIE HYMAN: Yeah, and I'm just seeing a note from the team over at Bank Of America with its reaction here. And basically, they say, you know, the pace, which got a lot of the emphasis yesterday, is less important than the terminal rate, which is still also a big focus to the conversation. They say the pace is secondary to how high and how long. It's now more about the destination, the terminal federal funds rate, than the journey, the pace of rate hikes to get there. So that kind of sums up where we stand.

BRAD SMITH: I wish somebody would have told me that when I was playing the Oregon Trail so many years ago, because that was a challenging game and route as well.