Federal Reserve Chair Jerome Powell stated on Friday that the Fed may need to raise interest rates further in order to control inflation. He acknowledged the easing price pressures and the strong performance of the U.S. economy, but emphasized the need for caution in upcoming meetings. Powell also made it clear that the central bank has not yet determined if its benchmark interest rate is high enough to ensure a return to the 2% inflation target.
During his keynote address at the Jackson Hole Economic Policy Symposium, Powell emphasized the Fed’s responsibility to bring inflation down to the desired goal. He acknowledged that although inflation has decreased from its peak, it remains too high. The Fed is prepared to raise rates further if necessary and intends to maintain a restrictive policy until they are confident that inflation is moving sustainably towards the target.
Powell expressed concern about recent data indicating that the economy may not be cooling as expected. He highlighted the robust consumer spending and the potential rebound in the housing sector as signs that the economy may continue to grow above trend. If this trend persists, it could jeopardize progress on inflation and warrant further tightening of monetary policy.
The Fed is grappling with conflicting signals from an economy where inflation has slowed without significant negative impact. While this is a positive outcome, it raises the possibility that current Fed policy may not be restrictive enough to achieve its objectives.
Unlike last year’s speech, Powell did not warn of “pain” from further policy tightening. However, he did not indicate that rate cuts were imminent or acknowledge the need to adjust rates downward once inflation cools further.
Following Powell’s remarks, stocks briefly increased before easing. Rate futures indicated a slightly higher probability of another rate hike later this year and a slightly lower chance of rate cuts next year.
Michael Arone, chief investment strategist at State Street Global Advisors, described Powell’s approach as walking a tightrope. Arone noted that Powell is pleased with the progress of monetary policy and inflation reduction but remains cautious and aware that there is still work to be done.
Powell acknowledged the difficulty of precisely determining the extent to which the current benchmark interest rate has reached the “neutral” rate needed to slow the economy. This makes it challenging to assess the current policy stance.
Powell reiterated the Fed’s diagnosis of inflation progress, highlighting the easing of goods inflation and the expected decline in housing inflation. However, he expressed concern about continued consumer spending on services and a tight labor market, which may hinder a return to the 2% inflation target.
While recent declines in underlying inflation measures are welcome, Powell emphasized that sustained progress requires more than just two months of positive data. He stated that given the size of the services sector, further progress will be essential and may require an economic slowdown.
Powell emphasized that restrictive monetary policy will likely play a crucial role in achieving the inflation target. He stated that bringing inflation sustainably back down to 2% will require a period of below-trend economic growth and some softening in labor market conditions.
Powell reaffirmed the Fed’s commitment to achieving and maintaining a monetary policy stance that is sufficiently restrictive to bring inflation down to the target level over time. He concluded his speech by stating that the Fed will continue its efforts until the job is done.
The article was reported by Howard Schneider and Ann Saphir, with additional reporting by Lewis Krauskopf. It was edited by Andrea Ricci. The Thomson RushHourDaily Trust Principles apply to their reporting.
