In a speech to the Brookings Institution in Washington Federal Reserve Chair Jerome Powell clearly confirmed what other Fed officials have said this week:
1. The Fed will raise interest rates at its December 14 meeting by 50 basis points and not 75. That would follow on four straight 75 basis point interest rate increases.
2. The Fed will moderate the pace of its interest rate increases going forward.
3. The peak for the Fed’s benchmark interest rate will be “somewhat higher” than estimated in September. The Fed’s estimate in September was for a peak of 4.6% in 2023. The current benchmark rate is 3.75% to 4.00%. The Fed Funds futures market sees rates peaking at about 5% in the second quarter of 2023.
What he didn’t clarify is what that peak rate might be or when the financial markets might see it. “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level,” he said. “Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation.”
In the absence of that clarity, financial markets reacted positively to what they did know–that the Fed is going to moderate its interest rate increases.
The Standard & Poor’s 500 closed 2.62% higher. The Dow Jones Industrial Average ended up 1.72% on the day. The NASDAQ Composite finished ahead 4.41% and the NASDAQ 100 was up 4.58%. The small-cap Russell 2000 added 2.10%.
The benchmark 10-year Treasury saw its yield fall 8 basis points to 3.67%.
Oil climbed with U.S. benchmark West Texas Intermediate gaining 3.01% and international benchmark Brent advancing 2.89%.
Financial markets also liked it that Powell continued to talk down the odds of a recession. An economic soft landing is “very plausible,” he said.
