Fed’s Powell to take the stage amid a suddenly choppy landscape

Oct 19 – Federal Reserve Chair Jerome Powell will take the podium in New York on Thursday with his colleagues at the US central bank in apparent agreement to hold interest rates unchanged at their next meeting in two weeks but with still-great uncertainty about what happens after that.

In remarks scheduled for 12 p.m. (1600 GMT) at the Economic Club of New York, Powell will all but close out a frenetic month following US monetary policymakers’ last meeting in mid-September, when they opted to leave their benchmark lending rate unchanged in a range of 5.25% to 5.50% to assess how the economy was evolving.

Since then, data has shown US job growth reaccelerating unexpectedly, retail sales defying predictions of a slowdown and varying measures of prices offering up inconsistent signals as to whether inflation is on track to return to the Fed’s 2% target in a timely manner.

If that were not enough, the bond market is reeling and tightening financial conditions at a rapid clip. The most deadly Middle East conflict in years has erupted, with no swift resolution in sight and worries it may widen into a regional war with unknown economic consequences.

Hours before Powell was due to speak, the latest read on the labor market showed new claims for unemployment benefits tumbling to the lowest since January, although the rolls of those on benefits for more than a week edged up to the highest since July.

At the same time, the bond market sell-off continued, threatening to drive the yield on the 10-year Treasury note that is instrumental as a credit benchmark for households and businesses above the 5% threshold for the first time since 2007.

The Fed chair must parse it all while walking a fine line between sounding too confident or too doubtful, with a lean too far in either direction having the potential to swing financial markets – and overall financial conditions in their wake – in unwanted directions.

Powell’s appearance comes less than 48 hours before the beginning of the traditional quiet period ahead of the rate-setting Federal Open Market Committee’s meeting on Oct. 31-Nov. 1. While a handful of other Fed officials have appearances later on Thursday and Friday before blackout begins on Saturday, it is Powell’s remarks that will set the tone for policy expectations heading into that meeting, and financial markets will hang on every word.

“We think the Fed chair will stick to the message delivered by Vice Chair (Philip) Jefferson that the data has been coming in stronger than expected, but there has also been a big move in yields, which has tightened financial conditions, so no urgency for a policy response in November and the Fed can adopt a wait-and-see approach,” Evercore ISI Vice Chairman Krishna Guha wrote.

Indeed, another senior Fed official – Governor Christopher Waller – on Wednesday said he wants to “wait, watch and see” if the US economy continues its run of strength or weakens in the face of the Fed’s rate hikes to date. It was a notable signal from one of the Fed’s more hawkish policymakers that rates for now look set to remain where they are, and it parallels recent commentary from other officials during the turbulent inter-meeting period.

Should they leave rates unchanged in two weeks as is now widely expected, it would mark the first back-to-back meetings with no rate increase since the Fed kicked off its hiking campaign in March 2022.

While inflation has abated significantly from its peak levels in June 2022, progress has been choppy and Fed officials like Waller are eager to see if the tightening they’ve delivered so far begins to “bite” and slow activity sufficiently to return inflation to target without causing a recession.

A Reuters poll of more than 100 economists published on Wednesday showed more than 80% expect no rate hike at the next meeting, and most also believe the Fed is done with rate hikes even though a majority of policymakers at their September meeting projected one more quarter-point increase was likely to be needed by year end.

Many in the poll offered the caveat that if progress on inflation stalls out or reverses, the Fed would not hesitate to resume raising rates.

Waller said as much on Wednesday: “If the real economy continues showing underlying strength and inflation appears to stabilize or reaccelerate, more policy tightening is likely needed despite the recent run-up in longer-term rates.”

(Reporting by Dan Burns and Ann Saphir; Editing by Andrea Ricci and Chizu Nomiyama)