FX.co ★ Powell unveils plan to fight stubbornly high inflation

Fed Chair Jerome Powell unveiled the regulator's strategy aimed at curbing inflation. He said that the key interest rate in the US would be higher than expected. However, there is still a possibility of slower hikes.

On Wednesday, the Federal Reserve raised the benchmark rate by 75 basis points for the fourth time in a row. "We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected," he said.

Powell repeated the idea to slow the pace of rate increases. "So that time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made," he said.

He also pinpointed that it was too early to think about a pause.

All dollar instruments showed the same reaction.

EURUSD:

GOLD:

"Slower for longer," declared JP Morgan Chase & Co, chief U.S. economist Michael Feroli in a note to clients. "The Fed opened the door to dialing down the size of the next hike but did so without easing up financial conditions."

Initially, stocks increased, whereas the yield of treasury bonds dropped together with the US dollar. The decline was caused by hints that the key interest rate hike may end soon. However, later, Jerome Powell announced a higher peak of the key interest rate, adding that the regulator has every tool to continue monetary policy tightening. Against the backdrop, the yield of treasury bonds and the greenback surged, whereas stocks fell. The S&P 500 suffered the biggest loss on Wednesday since January 2021.

Officials that support the approach aimed at capping inflation, which is near its 40-year high, gathered several days before the midterm elections to the US Congress. Notably, the price pressure was the key issue of the meeting.

On November 8, Joe Biden and his team have every chance to lose control over the US Congress. Some representatives of the Democratic party are urging the Fed to choose a more dovish stance. Powell is trying to avoid political issues.

The higher the interest rates are, the harder it is to control the situation. Officials admit that the monetary policy tightening has a delayed effect. The tighter the policy becomes, the more it slackens inflation as well as economic growth and employment.

Nevertheless, Jerome Powell made it clear that the regulator would not stop and would push inflation to the target level of 2%.

"The historical record cautions strongly against prematurely loosening policy," he said. "We will keep at it until we are confident the job is done," he added.

In September, the Fed predicted a 50-basis-point rise in December. In this case, the benchmark rate will total 4.4% this year and 4.6% in 2023, whereas the first cut is planned for 2024.