Will the Federal Reserve hit markets with another super-sized rate hike in December?
That was the big question going into Fed Chair Jerome Powell's speech before the Brookings Institution on Wednesday, and the answer was relatively straightforward as far as comments from the Fed usually go.
“The time for moderating the pace of rate increases may come as soon as the December meeting,” said Powell.
The nation's top banker explained that the impacts of monetary policy come with "uncertain lags" and that the "full effects of our rapid tightening so far are yet to be felt," so it makes sense to pull back slightly as the Fed gets closer to the level of restraint needed to bring inflation down to its 2 percent target range.
The Fed has raised its benchmark rate by 75 basis points at the last four FOMC meetings. So a smaller hike likely means a 50 or 25 basis point increase.
The vibe shift on Wall Street was immediate. The S&P 500 was up 1.6 percent following the comments, and the Dow Jones Industrial added nearly 400 points.
However, Powell balanced the hint at moderating with more hawkish language about the need to maintain a tighter monetary policy for the foreseeable future.
"It is likely that restoring price stability will require holding policy at a restrictive level for some time," he said. "History cautions strongly against prematurely loosening policy. We will stay the course until the job is done."
Powell also addressed the state of the labor market, noting that wage gains remain historically high and the unemployment rate historically low.
To be clear, strong wage growth is a good thing," he said. "But for wage growth to be sustainable, it needs to be consistent with 2 percent inflation."
He added that the current labor shortage is the result of excess retirements and slower growth in the size of the working-age population, in large part due to COVID-19-related deaths and a fall in net immigration.
Increasing total labor force participation could remedy some of these issues, said Powell, but that's a long-term endeavor, and one ill-suited to the Fed.
"Policies to support labor supply are not the domain of the Fed: Our tools work principally on demand."