FX.co ★ Fed to tighten its monetary policy due to high inflation

The Fed plans to tighten its monetary policy in response to high inflation which totaled 8.2% in September.

Federal Reserve Chairman Jerome Powell made it clear that the interest rates cap is likely to be higher than previously assumed. He also added that the path to achieve a "soft landing" had narrowed.

The press conference was followed by the Fed's decision to raise interest rates by 75 basis points for the fourth straight time. The latest hike means that the Fed has already raised rates by 375 basis points since March, bringing the key rate to a range from 3.75% to 4%.

Powell noted that though there might be a slowdown in rate hikes in December or February, the US central bank would likely raise rates higher than previously expected. "At some point, it will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal," he said. 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."

Powell also acknowledged that the path to achieve a "soft landing" had narrowed as monetary policy had become more restrictive in 2022. "The inflation picture has become more and more challenging over the course of this year, without question," he continued. "That means that we have to have policy be more restrictive, and that narrows the path to a soft landing."

The Fed announced that the US central bank would take into account "the cumulative tightening of monetary policy, the lag with which monetary policy affects economic activity and inflation, as well as economic and financial events."

This was a divergence from previous statements, in which the Fed had not placed as much emphasis on slowing monetary tightening.

During the press conference, Powell hinted that future rate hikes could be less aggressive. He noted that the level of raising the discount rate and the period to keep it high were of key importance.

"At some point it will become appropriate to slow the rate of increases. So the time is coming, and it may come as soon as the next meeting or the one after it. No decision has been made," Powell said. The question of when to moderate the pace of increase is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive."

Powell also added that the Fed had not raised the rates aggressively. And even if it had, it would have been easier to deal with.

Another hawkish point is that the pause in rate hikes is unlikely as the December meeting will indicate how high the Fed can raise rates.