Federal Reserve Chair Jerome Powell is expected this week to cement expectations that the central bank will slow its pace of interest-rate increases next month, while reminding Americans that its fight against inflation will run into 2023.
Powell is scheduled to deliver a speech, nominally focused on the labor market, at an event today hosted by the Brookings Institution in Washington. It will be one of the last engagements by Fed policymakers before the start of a quiet period ahead of their rate-setting meeting Dec. 13-14.
The event provides Powell with a stage to echo fellow Fed officials in signaling they will raise the U.S. benchmark rate by half a percentage point at their final meeting of the year, after four successive three-quarter-point increases.
But with inflation still way above the central bank's 2% target, he is likely to dovetail any talk of a downshift with a warning that rates will have to rise further next year.
Investors expect the Fed to slow down next month, with rates peaking around 5% next year from the current range of 3.75% to 4%, according to pricing of contracts in futures markets.
Those expectations are in line with Powell's remarks after the Fed's meeting earlier this month, when he indicated that officials could slow rate increases as soon as next month, even as they ultimately raise rates higher than previously thought.
Officials in September saw rates reaching 4.4% by the end of this year and 4.6% by the end of next year, according to median projections released after that meeting. Those forecasts will be updated at next month's gathering.
Two Fed officials said Monday that they favor raising the Fed's key rate to roughly 5% or more and keeping it at its peak through next year -- longer than many on Wall Street have expected.
John Williams, president of the Fed Bank of New York, who is among a core group of officials around Powell, said in a speech to the Economic Club of New York that the central bank has "more work to do" to reduce inflation.
And James Bullard, president of the St. Louis Fed, suggested that financial markets are underestimating the likelihood the Fed will have to be more aggressive in its fight against the worst inflation bout in four decades.
In an interview with Marketwatch, Bullard suggested that the speed of the Fed's rate increases isn't as important as the ultimate level of its benchmark rate, which he said could exceed the 5% that financial markets have priced in.
The central bank, he added, will likely have to keep its benchmark rate above 5% all through 2023 and into 2024. He also reiterated his view that the Fed should be prepared to raise that rate to the "lower end" of a range between 5% and 7%.
By contrast, financial markets have projected that the Fed will have to reverse course and start cutting rates by next September, presumably in response to a recession that many economists expect will occur next year.
Williams suggested that there are some positive signs that inflation is easing, noting falling prices for lumber, oil, and other commodities. Supply chains are also loosening, he said.
Yet the job market has stayed stronger than he expected, Williams said, with the unemployment rate, at 3.7%, still near a half-century low.
"That argues that we'll need to have a somewhat higher path for interest rates" than the Fed projected in September, Williams said. At that time, the officials forecast that their benchmark rate would reach a range of 4.5% to 4.75% by early next year.
He said he now expects the unemployment rate to rise to 4.5% to 5% by the end of next year, with inflation falling to 3% to 3.5% by then.