Jerome H. Powell, the Federal Reserve chair, signaled on Wednesday that the central bank could slow its rapid pace of interest rate increases at its December meeting while making clear that borrowing costs have farther to climb as policymakers remain concerned about a sustained bout of inflation.
Investors cheered his comments, with stocks surging at the mere hint that the Fed’s supersize rate increases could soon taper off even as Mr. Powell underlined that he and his colleagues were focused on raising rates high enough to tame inflation, rather than on how fast they got there.
The S&P 500 climbed more than 3 percent, the index’s best day in over two weeks. The Nasdaq composite index, which is particularly sensitive to changing views on interest rates, rose 4.4 percent.
The Fed has lifted interest rates from near zero as recently as March to a range of 3.75 to 4 percent at its meeting this month. Its past four rate moves have come in three-quarter-point increments — huge adjustments, the likes of which the Fed had not made since 1994. Central bankers have been clear that they think it would be wise to slow the pace soon, and Mr. Powell locked in market expectations for a half-point move at the central bank’s Dec. 13-14 meeting.
“The time for moderating the pace of rate increases may come as soon as the December meeting,” Mr. Powell said during a speech at the Brookings Institution in Washington.
Moving less quickly would allow the Fed to keep up its battle against the most rapid inflation in decades while giving policymakers more time to see how the substantial rate moves they had already made were playing out. While interest rate changes work promptly to slow the housing market, the full effect can take months or years to flow through the economy.
If Fed officials raise rates too much and realize their mistake belatedly, they could cost Americans jobs and put the economy through a rough recession that is deeper than what is necessary to control inflation. That is something officials want to avoid.
“My colleagues and I do not want to over-tighten,” Mr. Powell said, referring to rate increases that tighten the flow of money too much. “Cutting rates is not something we want to do soon. So that’s why we’re slowing down, and going to try to find our way to what that right level is.”
Still, Mr. Powell and his colleagues are trying to strike a balance. Even as they lay the groundwork to imminently slow down, they want to make it clear that they are not giving up on their campaign against rapid price increases.
If investors believe that the Fed is dialing back its plans, and asset prices rise in a sign of relief, money could become cheaper and easier to borrow, undoing some of the monetary restraint that the central bank has ushered in — and making inflation even harder to vanquish. Wednesday’s market moves highlighted that challenge.
As they try to demonstrate their continued commitment to bringing inflation under control, officials have also been trying to shift the focus to how much more rates have to climb and how long borrowing costs are kept high enough to restrain the economy.
“It is likely that restoring price stability will require holding policy at a restrictive level for some time,” Mr. Powell said.
Though the Fed chair acknowledged that inflation had recently shown hopeful signs of slowing, he warned against reading too much into one month of data. He emphasized that wage growth remained too rapid to allow price increases to ease back to the Fed’s 2 percent annual goal. Given that, he repeatedly stressed that central bankers would need to keep lifting interest rates — probably by more than they had predicted as recently as September — to ensure that they returned price increases to normal.
“We will stay the course until the job is done,” he said.
Mr. Powell was not alone in sending that message. His colleagues across the Fed system have been emphasizing that they have more to do in cooling the economy and helping inflation to come down.
“Consumer spending has remained resilient” and is “supported by labor income growth and still elevated savings,” Lisa D. Cook, a Fed governor, said during a speech in Michigan on Wednesday. “How far we go, and how long we keep rates restrictive, will depend on observed progress in bringing down inflation.”
The road to slower inflation could be a long one. Mr. Powell pushed back on any notion that a recent moderation in price increases is a sure sign that price jumps will return to more acceptable levels soon.
“Down months in the data have often been followed by renewed increases,” he said. And while many economists expect inflation to moderate next year, “forecasts have been predicting just such a decline for more than a year, while inflation has moved stubbornly sideways.”
Mr. Powell also pointed out that even if goods prices weigh on inflation and rent growth moderates next year as economists expect, the job market remains very tight — and signs of slowing so far are not conclusive.
That could help keep inflation elevated. When employers are paying more in wages, they are likely to try to pass those climbing labor costs on to their customers by raising prices. The Employment Cost Index, a quarterly measure of wages and benefits, is climbing 5 percent on a yearly basis. That is far faster than the roughly 2.2 percent that was normal in the years leading up to the pandemic.
“We want wages to go up strongly, but they’ve got to go up at a level that is consistent with 2 percent inflation over time,” Mr. Powell said. “You’re 1.5 or 2 percent above that with current wage increases.”
The Fed will receive further information on the labor market and inflation before its next monetary policy meeting. A fresh inflation report that the central bank watches closely is set for release on Thursday, and the November jobs report will be out on Friday.
How the economy shapes up in the months ahead is likely to inform how high rates have to go next year — and whether the Fed can achieve what officials often refer to as a “soft landing,” in which the labor market comes back into balance and inflation slows without a major spike in the jobless rate.
Mr. Powell said he still saw a path to a soft landing, though it could be narrow if the Fed has to leave interest rates high for a longer period to wrangle inflation.
With price increases showing hopeful signs of pulling back, some commentators have warned that the Fed risks overdoing it, threatening the health of the labor market and possibly global upheaval. On Wednesday, Mr. Powell pushed back on such criticism.
“We don’t think the world is going to be a better place if we take our time and inflation becomes entrenched,” Mr. Powell said, noting that a later but more aggressive response could hurt even worse. “The world will be better off if we can get this over quickly.”
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