Jay Powell has warned that inflation “remains too high”, raising the prospect of further interest rate increases should price pressures persist.
In a highly anticipated speech on Friday, the chair of the US Federal Reserve struck a hawkish tone, referring to the central bank’s readiness to maintain a “restrictive” policy as it navigates the final stages of its campaign to stamp out the worst inflation shock in decades.
“Although inflation has moved down from its peak — a welcome development — it remains too high,” Mr Powell said at the Fed’s annual economic symposium at Jackson Hole, Wyoming.
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“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,” he added.
Mr Powell pledged that the central bank would “proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data”.
Since March 2022, the Fed has lifted its benchmark policy rate from near zero to a range of 5.25 per cent to 5.5 per cent.
While Mr Powell said the full effects of past rate rises have not yet materialised and probably mean “significant further drag in the pipeline”, he signalled that the Fed was focused on the upside risk to inflation.
“Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” he said, adding that “there is substantial further ground to cover to get back to price stability”.
The Fed faces a difficult task in the coming months to first determine whether officials need to raise the benchmark policy rate beyond its current 22-year high. It then must decide how long to keep rates elevated before considering any cuts.
The central bank is widely expected to forgo another rise in interest rates at its next policy meeting in September. Some market participants are anticipating a final quarter-point increase at the Fed’s meeting in late October. Rate cuts are not expected until well into 2024.
Mr Powell reiterated that getting inflation back down to its target would require not only a period of “below-trend economic growth” but also “some softening in labour market conditions”.
His comments reiterated a message he sent at last year’s Jackson Hole symposium when he said the Fed was determined to “keep at it until the job is done”.
Mr Powell’s warning on Friday comes at a fraught moment for financial markets, which have recently struggled to digest a recent surge in US borrowing costs. Once adjusted for inflation, the “real” yield on the benchmark 10-year Treasury note now hovers at its highest point in more than a decade. Mortgage rates have also soared.
While the debate about more immediate policy actions appears far from settled, officials are more unified in their view that getting inflation back to the Fed’s 2 per cent target will be a slow process that will probably require the central bank keeping its benchmark rate higher for a longer period.
Economists say such a “higher-for-longer” approach is reinforced by the likelihood that the so-called neutral rate of interest, or R-star — a level that neither stimulates nor suppresses growth — is higher than in the past.
Rather than a rapid retreat to the era of ultra-low interest rates that dominated the post-global financial crisis period, economists reckon that stronger-than-expected growth, swelling government deficits and revved-up investment in domestic manufacturing and green technology have pushed up borrowing costs on a sustained basis.
Mr Powell on Friday did not discuss the prospects of a higher R-star but said, “we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint”. — Copyright The Financial Times Limited 2023