Jerome Powell’s Not for Turning—Yet

The Federal Open Market Committee increased its target range for the fed funds rate by 0.75 percentage points, to 3.75%-4%, as Mr. Powell had primed markets to expect. But investors cheered the FOMC statement, which said future decisions will account for “the cumulative tightening” achieved so far as well as “the lags” with which monetary policy operates. Wall Street has been searching for signs the Fed might start moderating the pace of rate increases or stop raising altogether, and it sounded like the FOMC was offering that hope. Stock and bond prices surged.

Then Mr. Powell met the press, and his message remains more hawkish than not. While allowing that the pace of rate increases might slow, he also said recent data suggest the top rate the FOMC needs to reach may be higher than the Fed has previously predicted. He also swatted away Wall Street’s fretting about “overtightening” by saying he believes the greater risk would be not to tighten enough.

Message received. Stocks promptly fell, by 3.4% in the case of Nasdaq.

This is no mark against Mr. Powell. Investors have long bet on easy money, even as inflation rose to its current dangerous level. The labor market remains surprisingly strong given mounting recession fears, and the economy so far is weathering a moderation in the housing market prompted by rising mortgage rates. This gives the Fed political leeway to keep up its inflation fight, and Mr. Powell is right to take advantage.

He also delivered a rebuke to critics abroad who fret that the Fed will plunge the global economy into recession. The U.N. Conference on Trade and Development and the International Monetary Fund, among others, warned last month that rising interest rates and a strong dollar endanger the world economy, especially developing economies.

Mr. Powell’s correct retort: “The world’s not going to be better off if we fail [to get inflation under control]. Price stability in the United States is a good thing for the global economy over a long period of time.”

He and his peers at developed-economy central banks would do the world a favor by coordinating better to moderate exchange-rate gyrations. But if they’re not willing to do that, at least the Fed can stick to its own price-stability mandate at home.

Even at 3.75%-4% the Fed’s base rate is negative in real terms. No disinflation we can remember was achieved without rates rising above the inflation rate. The Fed’s inflation target is 2% while personal-consumption expenditure inflation (the Fed’s favorite measure) was still 6.2% in September. The Fed will have to watch for signs of financial trouble of the kind that hit British pension funds, but it still has a lot of anti-inflation work to do.

Milton Friedman

would have smiled at the Fed’s reference to “lags” in the impact of higher rates, but we doubt he would have called for a retreat this soon in the fight against the worst inflation in 40 years.