Fed Chair Powell made clear in a recent speech that services inflation is what concerns him most, and that interest rates are approaching the level the Fed wants to see. That makes a 0.5 percentage point rate move for the Fed's December meeting most likely.
Powell was candid that the Fed does not know precisely where peak interest rates should be, so moving more slowly on rates as that point approach appeared a prudent risk-management strategy.Powell shared that one metric he is watching very closely is wage inflation. He sees a clear imbalance in the U.S. jobs market as demand outstrips supply, in part as many older workers left the workforce during the pandemic and have not returned.
This is pushing up wages, which in turn, is driving up service prices in Powell’s view. For example thePowell is not ready to step back from the inflation fight after a positive month of CPI data. He expects the Fed to continue to keep rates high until it is clear that inflation is trending back to the Fed’s 2% target. That means another hike in December and holding rates at high levels until inflation data is a lot more encouraging.
He will be watching wage inflation closely, since he is more confident that the costs of goods and housing are starting to decline. Still Powell’s tone is softening compared to the Jackson Hole speech he gave in late summer. The battle with inflation may not be over, but rate hikes may be coming to an end in the coming months.
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