"The strong measures taken by policymakers have pushed interest rates into restrictive territory, which means that monetary policy is currently putting downward pressure on economic activity and inflation," he said.

Noting that headline inflation averaged 2.5 percent over the past six months ending in October, close to the Federal Reserve's 2 percent target, Jerome Powell acknowledged that monetary policy has largely slowed the economy as expected, with interest rates that may largely be in "constrained territory."

"We got what we wanted to get" from the economy, Powell said in his speech at an event at Spielman College in Atlanta, acknowledging that the full impact of a significant rate hike by the Federal Reserve (5.25 percentage points) is likely to emerge later.

"Having come a long way so quickly, the FOMC will proceed cautiously, as the risks of tightening and over-tightening have become more balanced."

"The data will tell us if we need to do more" than raise interest rates, he explained.

Powell, as some Fed members have done in recent weeks, stressed that it is still too early to declare the Fed's inflation battle over, due to the procedure used by the central bank to set its target. Prices as of October rose 3.5% after excluding food and energy costs, a measure the Fed sees as a better indication of inflation trend.

Jerome Powell, like his colleagues' recent statements, reiterated that it is too early to claim victory in the fight against inflation. He confirmed that annual inflation remains high at 3.0 percent based on the Fed's target.

"We are ready to tighten the policy further if it is appropriate to do so," he said.

But Powell's comments also reflected growing confidence that current interest rates in the range of 5.25 percent to 5.50 percent could be enough to get the job done.

The Fed meets on December 12-13 and is expected to leave the interest rate unchanged for the third consecutive meeting, reinforcing the prevailing belief in the market that the Fed has ended the rate hike.

"He (Powell) used the word 'balanced' and the message he's sending is that the Fed is not going to change its rhetoric, but things are going in the direction they want and they won't raise interest rates again." Peter Cardelo, chief market economist at Spartan Capital Securities, said: "They're done, they're done, that's what the market thinks."

Peter Cardelio, chief economist at Spartan Capital Securities, interprets Jerome Powell's use of the word "balanced" in his remarks as a sign that the Fed will not change its message but is satisfied with how things are progressing and has no plans for further rate hikes. Cardelio believes that the Federal Reserve has finished its rate hike cycle, and that the market shares this idea.

U.S. stocks erased early losses in Friday's session to turn higher after Powell's comments, and two-year Treasury yields fell to their lowest level since June 13, reflecting markets' optimism that the tightening cycle is over.

Interest rate futures speculators added to bets that the Fed will leave interest rates flat at policy meetings in December and January, and then start cutting interest rates at the March meeting.

"Soft landing"

The Fed chairman said policymakers still consider the uncertainty in the economic outlook to be "unusually high," one of the factors in their insistence that interest rates may still need to rise.

But he also said the outlines of the hoped-for "soft landing" appeared to be materializing, with the labor market still strong even as spending and output growth slowed and price pressures eased.

While acknowledging the slowdown in manufacturing activity and declining factory employment, Powell emphasized the strength of the labor market and the gradual moderation of wage growth toward sustainable levels. A further slowdown in spending and output is expected as restrictive monetary policy begins to take effect.

"My colleagues and I expect spending and output growth to slow over the next year, as the effects of the pandemic fade and as restrictive monetary policy affects aggregate demand," Powell said.

"The pace of economic job creation remains strong, slowing towards a more sustainable level... Wage growth remains high, but is gradually moving toward more consistent levels as price inflation of 2 percent over time... Real wages are growing again as inflation falls," Powell said.

Shortly before Powell delivered his remarks, a major reading on the performance of the U.S. manufacturing sector showed that activity there remained weak and factory employment declined.

The Institute for Supply Management's Purchasing Managers' Index (PMI) indicated that the sector has been in contraction for 13 consecutive months, the longest such period in more than two decades, as demand for goods continues to decline.

Here are the most important points of Powell's speech:

  • Risks around interest are becoming more balanced.
  • It is too early to say that the US Federal Reserve's monetary policy has become tighter and sufficient to bring inflation back to target.
  • The Fed will raise interest rates if necessary to reduce inflation.
  • Uncertainty about the economic outlook is unusually high.
  • Interest rates are doing well in the currently restricted area.
  • We have made significant progress in reducing inflation, but we need to see more progress in reducing inflation to 2 percent.
  • Wage growth remains high but moderate to more sustainable levels.
  • As long as unemployment remains low and wages rise, some spending will continue.
  • U.S. unemployment is rising but still historically low.
  • It would be too early to confidently conclude that we have achieved a sufficiently restrictive stance, or to speculate when monetary policy easing will begin.
  • The Fed is willing to tighten policy further if it becomes appropriate to do so.
  • Inflation is still well above target but is moving in the right direction.
  • We were surprised by the strong growth this year.
  • The Fed believes the right thing to do now is to move cautiously.
  • It will take some time before we understand how AI affects the economy and jobs.