Federal Reserve chair pledges to move carefully on rates amid ‘range of uncertainties’

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The Federal Reserve will proceed “carefully” with forthcoming monetary policy decisions, its chair said on Thursday, in the latest indication that the US central bank is preparing to forego an interest rate increase at its meeting later this month.

Jay Powell struck a cautious tone just days before the central bank’s scheduled “blackout” period ahead of a two-day meeting starting on October 31, after which public communications are limited.

Powell not only acknowledged the multitude of risks officials now must consider as they determine how much more to squeeze the world’s largest economy to tame inflation, but he also emphasised that the Fed’s past actions had not yet had their full effect on demand.

“A range of uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little,” he said in prepared remarks at an event hosted by the Economic Club of New York.

“Given the uncertainties and risks, and how far we have come, the [Federal Open Market Committee] is proceeding carefully.”

The outlook for Fed policy had in recent weeks been muddied by mixed economic data and the resurgence of geopolitical tensions following the outbreak of conflict between Israel and Hamas.

Powell on Thursday said “highly elevated” geopolitical tensions “pose important risks to global economic activity” and would be something the central bank would monitor closely given the “highly uncertain” implications.

A jump in US borrowing costs has further complicated any assessment of how much more the central bank needs to restrain demand with higher interest rates, especially at a time when price pressures persist in some corners of the economy and labour demand remains elevated.

The benchmark 10-year Treasury note is trading close to 5 per cent for the first time since 2007, while the more policy-sensitive two-year note is hovering at a 17-year high.

Many officials — including Lorie Logan, the hawkish president of the Dallas Fed, and governor Christopher Waller — have suggested that tighter financial conditions may offset the need for the central bank to raise rates again this year, which most policymakers indicated would be necessary to fully tame price pressure as of projections released in September.

Powell said the Fed was “attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy”.

The Fed first pressed pause on its historic interest-rate rising campaign in June after 10 consecutive increases before delivering another quarter-point rate rise in July. It also opted against an increase at its meeting last month.

But even as the pace of monetary tightening has slowed, reflecting the Fed’s assessment that it need not be as aggressive at this late stage of its tightening campaign, officials insist it is too early to declare victory in the fight against inflation. 

“We are attentive to recent data showing the resilience of economic growth and demand for labour,” Powell said. “Additional evidence of persistently above-trend growth, or that tightness in the labour market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

Powell was delayed in delivering his remarks after protesters stormed the stage, saying that climate-related risks posed the biggest threat to the global economy.