US Federal Reserve (Fed) Chairman Jerome Powell has suggested the US central bank will continue to raise rates and is likely to keep them high for some time to curb inflation, suggesting the Fed will soon I opposed the idea of turning around.
“Returning price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday at the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record strongly cautions against easing policy prematurely.”
He said returning inflation to the 2% target is the central bank’s “top priority right now,” even though consumers and businesses will feel economic pain. He reiterated that an “unusually large” hike in benchmark lending rates could be appropriate when officials meet next month, but fell short of committing to it.
“Our decision at the September meeting will depend on the totality of incoming data and evolving outlook,” he said.
Ahead of Powell’s speech, investors were almost even on the odds of a 0.5 point or even 3/4 point rate hike at the September 20-21 Federal Reserve meeting.
In remarks that were to be live-streamed for the first time from inside the lodge where the event was held, Powell said, “It will take some time to restore price stability, and we will need tools to improve the balance between supply and demand. We need to use it vigorously,” he said. Since 1982.
Other recent Fed speakers also priced in futures markets against expectations that the Fed would quickly move to a more restrictive policy stance and then begin easing.
Powell said restoring price stability would require “persistence” of below-trend growth and a weak labor market. “Higher interest rates, slower growth and a softer labor market will bring inflation down, but will also bring some pain to households and businesses,” he said.
Powell’s remarks at a retreat of top policymakers from around the world came at a time when the US central bank was facing the highest inflation in 40 years. Officials have been slow to spot risks and are now moving aggressively to keep prices from accelerating further. The official raised 75 basis points at his two most recent meetings, suggesting the same could be considered again at next month’s meeting.
Critics have lashed out at the Fed for failing to anticipate a spike in inflation that it initially viewed as temporary. In his speech at a conference a year ago, Powell said price pressures were confined to a relatively narrow group of goods and services. But within months it spread, and by the time the Fed began raising rates from near zero, inflation had tripled its 2% target.
It’s stuck high: Fed-preferred inflation rose 6.3% in the 12 months to July, core measures minus food and energy, according to a government report released on Friday. rose 4.6%. Yields on his 2-year US government bond fell to a low the day after the report.
The Fed’s secretary told the audience, who had gathered for the first time in two years, that “the slowdown in inflation in July was welcome, but the one-month improvement was not confirmed before the committee was convinced that inflation was declining.” We are far from what we need to do,” he said. Due to the pandemic, the conference cannot be held virtually.
“We are deliberately shifting our policy stance to levels that are sufficiently restrictive to bring inflation back to 2%.”
In June, Fed officials projected interest rates to rise to 3.4% by the end of this year and 3.8% by the end of 2023, according to median estimates. We plan to update these forecasts in September. Investors had priced in the possibility of his rate cut in the second half of 2023, but Fed officials are starting to push back against that view.
Beyond the current rate hike cycle, policymakers are trying to assess whether long-term inflationary pressures will persist. Supply chain costs may be on the rise, and an aging population and immigration restrictions could keep the U.S. labor supply tight for years to come.
Powell said the labor market was “clearly out of balance” with demand for workers “substantially” exceeding supply.
The U.S. unemployment rate hit a 50-year low of 3.5% in July, and employment has fully recovered to pre-pandemic levels.
Ahead of Powell’s speech, several Fed officials stressed that central banking is far from over, with Kansas City Fed Commissioner Esther George saying that the destination for the federal funds rate is where markets are now. He said it could be higher than they factor in.
George, who will vote on monetary policy this year, said: “Interest rates must be raised to slow demand and return inflation to target.
Financial market benchmark lending rates will peak below 4% early next year.
Asked how high the Fed should raise its borrowing costs, George said there is “still room” and countered financial markets’ bets that the Fed would start cutting interest rates next year.
“I think we have to keep — it could be over 4%. I don’t think it’s out of the question,” she said in an interview with Bloomberg Television. I don’t think you’ll know that until you start watching.”
