The Federal Reserve is far from certain that its war on inflation is over and is willing to hike interest rates past their current 22-year high if necessary, the central bank’s chairman Jerome Powell said Wednesday, dousing the stock market’s recent surge spurred largely by optimism about the direction of monetary policy.
The Fed is “not confident” its current policy is “sufficiently restrictive” to bring down annual inflation to its 2% long-term target, Powell said in prepared remarks at an International Monetary Fund panel.
Powell said the bank “will not hesitate” to raise the federal funds rate again, adding further progress in slowing price stability is “not assured.”
Equity markets priced in Powell’s commentary as hawkish.
The S&P 500 fell about 0.4% after the publication of his speech, falling to a 0.8% loss on the day, while 10-year U.S. bond yields spiked 13 basis points Thursday as traders priced in a higher likelihood of more tightening from the Fed.
Powell’s remarks are his first public ones on monetary policy since last Wednesday, when he spoke to reporters following the Fed policy-setting committee’s decision to hold the federal funds rate steady and seemingly indicated the Fed is satisfied with the fruits of its rate hiking. Since last March, the Fed bumped rates from 0% to 0.25% to 5.25% to 5.5%. Inflation has declined, with the consumer price index down from a four-decade peak of over 9% last summer to 3.7% last month.
“We still believe the Fed is done hiking for this cycle, but today’s speech should serve as notice that their rhetoric must stay hawkish until they’ve seen further improvement in inflation,” JPMorgan’s chief U.S. economist Michael Feroli wrote in a note to clients.
Prior to Thursday, the S&P rose for eight consecutive sessions, jumping more than 6%, thanks in large part to hopes that Powell and company would ease the heavy pressure of higher rates on stocks. “The market seems to be convinced that the Fed is ready to declare victory on its campaign to quell inflation,” LPL Financial strategist Quincy Krosby wrote Thursday, explaining the reasoning for the strong gains in days leading up to Powell’s latest comments.