Federal Reserve Chairman Jerome Powell reiterated on Wednesday that smaller interest rate hikes are likely to come.

Even while he believes that the progress being made in the fight against inflation is generally insufficient, Federal Reserve Chairman Jerome Powell reiterated on Wednesday that smaller interest rate hikes are likely to come.

Powell said he believes the central bank is in a position to scale back rate hikes as early as next month, echoing recent remarks from other central bank officials and remarks made at the November Fed meeting.

“Despite some promising developments, we have a long way to go in restoring price stability,” Powell said.

However, he issued a warning that until concrete evidence of improvement on inflation materialises, monetary policy is likely to remain restrictive for some time.

The chairman pointed out that policy changes like raising interest rates and decreasing the Fed's bond holdings typically take time to propagate across 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,” he added.

According to CME Group data, markets had already priced in approximately a 65% possibility that the Fed will scale back its interest rate rises to half a percentage point in December after four consecutive 0.75-point increases. Since the early 1980s, this rate of rate increases is the fastest.

Where the Fed proceeds from here is yet to come. In contrast, Powell cautioned that restrictive policy will remain in place until inflation shows more consistent signs of declining, despite markets pricing in the likelihood of rate decreases later in 2023.

“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,” Powell said.

“It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy,” he added. “We will stay the course until the job is done.”

Powell's comments coincide with some ominous indications that the ultra-tight labour market is easing and inflation is declining.

The consumer price index showed growing inflation earlier this month, although not as much as economists had predicted. Separate statistics released on Wednesday showed that private payroll growth in November was far lower than anticipated and that fewer jobs were available.

Powell, however, claimed that recent statistics can be misleading and that he needs to see more reliable proof.

For instance, he stated that Fed analysts anticipate that the preferred core PCE price index for October, which is scheduled to be reported on Thursday, would show inflation running at a 5% annual pace. Although down from 5.1% in September, that would still be significantly higher than the Fed's long-term aim of 2%.

(Sources: investing.com, cnbc.com)