WASHINGTON – The United States central bank could scale back the pace of its interest rate hikes as soon as December, Federal Reserve chairman Jerome Powell said on Wednesday, while warning that the fight against inflation was far from over and key questions remained unanswered, including how high rates would ultimately need to rise and for how long.

“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting,” Mr Powell said in a speech to the Brookings Institution think-tank in Washington.

But in remarks emphasising the work left to be done in controlling inflation, Mr Powell said that issue is “far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level”.

While the Fed chief did not indicate his estimated “terminal rate”, Mr Powell said it is likely to be “somewhat higher” than the 4.6 per cent indicated by policymakers in their September projections.

He said curing inflation “will require holding policy at a restrictive level for some time”, a comment that appeared to lean against market expectations that the Fed could begin cutting rates next year as the economy slows.

“We will stay the course until the job is done,” Mr Powell said, noting that even though some data points to inflation slowing next year, there is still “a long way to go in restoring price stability”.

“Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation,” he added.

The Fed’s response to the fastest outbreak of US inflation in 40 years has been a similarly abrupt increase in interest rates. With a half-percentage-point hike expected at its Dec 13-14 meeting, the central bank would have lifted its overnight policy rate from near zero as at March to the 4.25 per cent to 4.5 per cent range, the swiftest change in rates since former Fed chairman Paul Volcker battled an even worse rise in prices.

This has made home mortgages and other forms of credit more expensive for consumers and businesses. It has not, however, had any appreciable impact on the US job market, where the current 3.7 per cent unemployment rate has led some policymakers to argue that they are free to tighten rates further without much risk.

But it has also had no convincing impact yet on inflation, a fact that has left open just how much further the Fed may need to raise rates into what it refers to as “restrictive” territory designed to slow the economy.

Mr Powell said Fed estimates of inflation in October showed its preferred measure still rising at about triple the central bank’s 2 per cent target.

‘Long way to go’

Mr Powell’s remarks ignited a robust rally in equity and bond markets, which have taken a pounding this year on the back of the Fed’s aggressive rate hikes.

The benchmark S&P 500 index shot into positive territory and was last up by about 1.5 per cent on the day, and bond yields, which move in the opposite direction to their prices, all tumbled. The yield on the two-year Treasury note, the maturity most sensitive to Fed rate expectations, dropped to about 4.47 per cent from 4.52 per cent. The US dollar weakened against a basket of major trading partners’ currencies.

In rate futures markets, traders added to the prevailing bets that the Fed would slow its pace of rate hikes at its meeting in two weeks.

“You can’t keep raising rates as quickly as they were doing it,” said Mr Rick Meckler, a partner at Cherry Lane Investments. “That said, investors always like the comfort of hearing it directly from the (Fed) chair.” REUTERS