Powell acknowledges disinflation again, but sees more hikes in long inflation war

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By Yasin Ebrahim

Investing.com -- Federal Reserve Chairman Jerome Powell on Tuesday, repeated that inflation was slowing, though reiterated the need for further hikes as the mission to bring inflation down to the central bank's target still has a long way to go amid a red-hot labor market.

"We didn't expect [the January jobs report] to be this strong, but it shows you why we think that this will be a process [to bring down inflation] that takes a significant period of time because the labor markets are extraordinarily strong," Powell said Tuesday to the Economic Club of Washington, reiterating the need for ongoing rate hikes.

The Fed is trying to "achieve a single policy that is sufficiently restrictive, to bring inflation down to 2% over time and we don't think we've achieved that yet," Powell added.

The fed chief, however, said that it was "good" that inflation is starting to come down and it wasn't at the cost of a strong labor market.

Last week's red-hot jobs report showed the economy created 517,000 new jobs in January, but the unemployment rate dropped to a more than four-decade low.

Powell's latest remarks were largely a recap of his prior remarks following the Fed's decision last week to downshift to a quarter-point hike. The scant new clues on monetary policy gives the fed options on policy to respond to incoming data either by delivering more hikes or pausing.

"He (Powell) didn't say anything new. Yes, he's not hawkish, but he's dovish either, " Zhiwei Ren, Managing Director and Portfolio Manager at Penn Mutual Asset Management told Investing.com's Yasin Ebrahim on Tuesday. "Powell is being a two-handed economist, he's trying to keep giving himself the option to either pause or hike in the last few meetings." 

"Powell has the luxury to wait because the CPI is going to come down just from the base effects, goods deflation, and lower rental prices...He is in no rush to do anything dramatic at this point," Ren added.

For others, however, the remarks were deemed hawkish enough to price in the prospect of a more hawkish Fed. 

“On the back of Powell's appearance we are adding a 25bp to the May FOMC meeting, bringing our expectation for the peak rate to 5.00% to 5.25%,” Morgan Stanley said in a note.

Expectations for a March hike are nearing fully priced in, while the odds of a May rate hike jumped to 69% from 38% last week, according to Investing.com's Fed Rate Monitor Tool.

Two further rate increases would take the Fed funds rate to a range of 5% to 5.25%, or 5.1% at the midpoint, in-line with Fed's December projections.