Stocks Rip Higher After Powell Says Fed Could Dial Back Interest Rate Hikes 'As Soon As The December Meeting'

The SPDR S&P 500 ETF Trust SPY jumped just minutes into Fed Chair Jerome Powell's Wednesday Brookings Institution speech when he suggested the Fed could begin easing back on its interest rate hikes starting in December.

Powell started off his speech by acknowledging that inflation remains top priority for the Fed.

"Inflation remains way too high. My colleagues and I are acutely aware that inflation is imposing significant hardship, straining budgets and shrinking what paychecks will buy," Powell said.

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Powell On Fed's Timing: While the Fed will continue to tighten to get inflation back down near its long-term goal of 2%, Powell said the Fed may move forward with smaller interest rate hikes from here. He noted that it takes some time before rate hikes have their full intended impact on the economy.

"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,” Powell said.

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Powell went on to say the Fed will maintain restrictive policy measures until it's clear inflation is consistently declining. Looking ahead, Powell said it will likely be "some time" before the Fed can pivot to loosening its policies.

"History cautions strongly against prematurely loosening policy. We will stay the course until the job is done," he said.

Powell's Expectations For Thursday's PCE Number: The Fed is anticipating the October core personal consumption expenditures (PCE) price index, which will be released on Thursday, will be up 5% from a year ago, Powell said.

That increase would represent a slight decline from 5.1% PCE inflation in September, but it is still well above the Fed's 2% target.

“It will take substantially more evidence to give comfort that inflation is actually declining. By any standard, inflation remains much too high,” Powell said.

Where Will Fed Funds Rate Land? The bond market is pricing in a terminal fed funds target range of between 5% and 5.25% in 2023, about 1.25% higher than the Fed's current target range. In September, Fed members projected a 4.6% terminal rate, but Powell said Wednesday the terminal rate will likely now be "somewhat higher than thought."

Powell also discussed the tight labor market in which there are still 1.7 job openings for each available worker. Powell said lack of available workers has driven wages higher, but inflation has offset much of those wage gains.

“To be clear, strong wage growth is a good thing. But for wage growth to be sustainable, it needs to be consistent with 2% inflation,” he said.