Jerome Powell, the chairman of the Federal Reserve, has recently made statements indicating that the central bank is prepared to continue raising interest rates in order to combat inflation. While there have been some signs that inflation may be easing, Powell has emphasized that the Fed is still committed to bringing inflation back down to its 2% target.
In a recent speech, Powell said that the Fed "will not hesitate to use our tools to support strong and sustainable economic growth and to achieve our price stability goal." He also noted that the Fed is "prepared to act decisively" if inflation does not come down as expected.
Powell's comments have been interpreted as a signal that the Fed is likely to either hold interest rates steady or continue raising them at its upcoming meetings if it deems it necessary. The next Fed meeting is scheduled for December 12-13, and markets are expecting a quarter-point rate hike if Powell decides to raise rates. While Powell and other officials say they are not even thinking about cutting rates just yet, some investors such as Bill Ackman expect cuts to begin around the middle of next year.
For a frozen U.S. housing market struggling with dwindling sales and record-low affordability, loosening monetary bodes well for lower mortgage rates. The Federal Reserve does not directly set mortgage rates, but its actions clearly influence them. Moreover, mortgage rates track the yield on the 10-year U.S. Treasury note, which moves in anticipation of monetary policy moves, what the Federal Reserve ends up doing, and investors’ reactions.
The Fed's decision to keep interest rates on hold is likely to have a number of implications for the economy. Higher interest rates can make it more expensive for businesses and consumers to borrow money, which can slow economic growth and potentially create a recession. Powell does not feel confident about inflation yet. He believes that cutting interest rates this soon could rekindle inflation while the Fed has not yet reached its 2% target.
Cutting interest rates would encourage people and businesses to take out loans to buy goods and services and as a result demand for goods and services increases. And when demand for goods and services increases, businesses can then raise prices in order for supply to meet demand. If prices rise too quickly, this then will lead to inflation again, and the Federal Reserve will then have to start applying contractionary policies again.
Powell has also said that he wants to give the Fed's current monetary policy stance more time to work. The Fed has been raising interest rates since March 2022, and these rate hikes are still having an impact on the economy. Powell has said that he wants to see how the economy responds to these rate hikes before considering a change in policy.
It is clear that Powell is not in a hurry to cut interest rates. He is concerned about inflation and the risks of rekindling it, and he wants to give the Fed's current monetary policy stance more time to work. This suggests that interest rates are likely to remain on hold for a while. How the economy will be doing in the first quarter of 2024 will determine whether or not interest rates will be cut.