Fed Chair Powell Cautious on Inflation: Potential Further Interest Rate Moves.
The Federal Reserve might need to lift interest rates further to counter persistently high inflation, according to Fed Chair Jerome Powell.
Speaking on Friday, he assured a cautious approach in the upcoming meetings, acknowledging the strides made in easing price pressures while also recognizing the risks stemming from the unexpectedly robust U.S. economy.
Although Powell’s message this year at the annual Jackson Hole Economic Policy Symposium wasn’t as stern as last year’s, his comments still held weight. This has led investors to lean toward the likelihood of another rate hike by the end of the year.
“Our decisions will be cautious as we determine whether to tighten policies more or maintain the current policy rate while awaiting additional data,” Powell stated during his keynote address. “It is the Fed’s responsibility to lower inflation to our 2% objective, and we are fully committed to doing so.”
Since March 2022, the Fed has raised rates by 5.25 percentage points, leading to a drop in inflation by their preferred measure from its peak of 7% last summer to 3.3%. Powell found this reduction encouraging but emphasized that inflation still remains too high.
He said, “We intend to maintain policy fairly tight until we am sure that inflation is gradually headed towards our intended objective, and we are ready to hike rates if required.”
However, Powell observed that there are indications that the economy might not be cooling as projected. He pointed to strong consumer spending and a potentially resurging housing sector, which could potentially jeopardize the progress made against inflation. Such above-average growth might warrant further tightening of monetary policy.
Powell’s remarks highlighted the Fed’s challenge in deciphering mixed signals from an economy where inflation has somewhat eased without significant adverse effects. This presents a positive outcome, but it raises the question of whether the Fed’s current policy is indeed restrictive enough to complete the task.
Unlike last year’s speech, where Powell issued a direct warning of impending tightening, he didn’t predict potential “pain” for households due to further policy adjustments. Nor did he suggest that rate cuts were imminent, unlike some policymakers who have hinted at the need for such cuts once inflation cools more sustainably.
Looking ahead, futures contracts related to the Fed policy rate indicate a probability of just under 20% for a rate hike in September. However, the chances of the policy rate ending the year in the range of 5.5%-5.75% are over 50%, which is a quarter-point higher than the current range. Aside from September, the Fed policymakers are scheduled to meet in November and December as well.
Powell acknowledged the challenge of precisely determining how far above the “neutral” interest rate the current benchmark rate stands. As a result, assessing the level of restraint the Fed is applying to growth and inflation remains difficult.
Regarding inflation progress, Powell echoed the common Fed analysis. He noted the decline in goods inflation following the pandemic-induced spike, along with expectations of a reduction in housing inflation. However, he expressed concerns that ongoing consumer spending on various services and a tight labor market might hinder a swift return to the 2% target.
Powell also emphasized that even though recent measures show underlying inflation declining, it will take more than a couple of months of positive data to build confidence in a sustainable drop in inflation. Given the significant size of the services sector, he believed that achieving further progress would likely require an economic slowdown.
In wrapping up his speech, Powell echoed sentiments from last year, reaffirming the Fed’s commitment to persistently working until the desired outcomes are achieved.
Despite a somewhat milder tone compared to the previous year, Powell’s remarks underscore his careful stance. He appears content with the progress of monetary policy and inflation reduction, yet remains steadfast in closely monitoring the situation and continuing the Fed’s efforts.
By: M Z Hossain, Editor Sky Buzz Feed
