26-8-2023 (WASHINGTON) Federal Reserve Chair Jerome Powell has suggested that the central bank might need to raise interest rates further to control inflation while acknowledging the robust performance of the US economy. He made these remarks at the Jackson Hole Economic Policy Symposium, promising to approach future decisions “carefully.”
Powell emphasized that the Federal Reserve would exercise caution in determining whether to implement additional tightening measures. However, he emphasized that the central bank had not yet concluded that its benchmark interest rate was sufficiently high to ensure inflation returns to the 2 percent target.
He stated, “It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak – a welcome development – it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
Powell expressed concern about recent data indicating that the economy might not be cooling as anticipated. Consumer spending has been strong, and the housing sector may be rebounding, which could jeopardize progress in curbing inflation and necessitate further monetary policy tightening.
While Powell’s remarks indicated that the Federal Reserve is grappling with conflicting signals from an economy where inflation has slowed without significant adverse effects, he did not issue a warning of “pain” for households as he did in the previous year’s speech. However, he also did not signal that rate cuts were imminent.
Market Reaction and Rate Hike Speculation
Market reactions indicated that there is a modest likelihood of a rate hike in the upcoming month, with futures pricing suggesting less than a 20 percent chance. Nevertheless, there is an increasing probability of a rate hike at one of the Federal Reserve’s subsequent two meetings, either on October 31 to November 1 or December 12 to December 13, with prices indicating a better-than-50 percent chance of ending the year with a policy rate in the range of 5.5 percent to 5.75 percent.
Analysts interpreted Powell’s remarks as a sign that the Federal Reserve is prepared to act if necessary but is not in a rush to do so.
The Challenge of Determining Policy Position
Powell acknowledged the challenge of determining precisely how the Federal Reserve’s current benchmark interest rate, between 5.25 percent and 5.5 percent, aligns with the “neutral” rate of interest needed to slow the economy. This ambiguity makes it difficult to assess the current state of monetary policy accurately.
Powell underscored the Federal Reserve’s standard assessment of inflation progress, citing a reduction in pandemic-era goods inflation and an expected decline in housing inflation. However, he expressed concern that continued consumer spending on services and a tight labor market could hinder a return to the 2 percent inflation target.
He also mentioned recent declines in measures of underlying inflation, excluding food and energy prices, but emphasized that more progress is needed to build confidence that inflation is moving sustainably downward.
Powell concluded his speech by reaffirming the Federal Reserve’s commitment to achieving and maintaining a monetary policy stance that will bring inflation down to the 2 percent target over time. He reiterated that the target would remain at 2 percent.
