Powell's Hawkish Speech Strikes a Blow to Rate Cut Expectations

In a dialogue with local business leaders hosted by the Dallas Fed, Powell stated, "The economy has not conveyed any signals that would necessitate an urgent cut in interest rates; the strong economic conditions allow us to act cautiously in our decision-making."

Regarding inflation, Powell pointed out, "The inflation rate is getting closer to our long-term target of 2%, but it has not yet been achieved. We are committed to fulfilling this mission, and under conditions where the labor market is roughly balanced and inflation expectations are well anchored, I expect the inflation rate to continue to decline towards the 2% target, although there may be bumps along the way."

To combat inflation, the Federal Reserve raised interest rates to their highest level in 20 years last year and maintained that level for more than a year to ensure that price pressures do not resurface. Since mid-2023, although U.S. inflation has significantly decreased, the slowdown in price growth has at times been uneven, including over the past two months.

In this regard, Powell reiterated that the path of the Fed's policy interest rates will depend on the upcoming data and the evolution of the economic outlook, and that they will closely monitor core measures of inflation for goods and services excluding housing, which have been declining over the past two years.

The Fed has cut rates in its last two meetings, first making a significant cut of 50 basis points in September when there were signs that the labor market might be weakening. At last week's meeting, officials again lowered the benchmark rate by 25 basis points, to a range of 4.5%-4.75%.

The Fed's next meeting will be held on December 17-18. In his latest remarks, Powell did not comment on the possibility of a rate cut at the December meeting. However, his related statements have clearly struck a significant blow to market expectations for a rate cut next month. According to the CME Group's FedWatch tool, the likelihood of the Fed achieving a three-rate cut in the coming month has again become a 50-50 proposition.