JACKSON HOLE, Wyo.—Federal Reserve Chair Jerome Powell argued for holding interest rates steady for now, but kept the door open to raising them later this year if the economy doesn’t slow enough to keep inflation declining.
Powell’s heavily anticipated address at the Kansas City Fed’s annual symposium here underscored how he is trying to thread the needle between restraining the economy enough to reduce price pressures without throwing it into a needlessly severe slowdown.
Powell twice said the Fed would “proceed carefully” in any further move, signaling he saw little urgency to raise rates at the central bank’s next policy meeting in September.
“Given how far we have come, at coming meetings we are in a position to proceed carefully,” as officials “decide whether to tighten further or, instead, to hold the policy rate constant and await further data,” he said in delicately scripted remarks.
But Powell noted recent signs the economy might not be slowing as officials expect. They have anticipated inflation to decline further because they expect the economy to grow below its long-run trend of around 2% over the coming year.
Powell said additional evidence that the economy might instead grow above that trend rate “could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
Fed officials lifted their benchmark federal-funds rate last month by a quarter-percentage-point to a range between 5.25% and 5.5%, a 22-year high, continuing the most rapid series of increases in four decades. Their next meeting is Sept. 19-20.
In June, most officials thought they would raise rates to a range between 5.5% and 5.75% this year, implying one more quarter-point increase later this year.
Some officials are uneasy about raising rates further because they expect past increases will continue to weaken the economy by making it more expensive and harder for companies and individuals to borrow. Others worry that strong economic growth could cause inflation to decline more slowly than anticipated if the Fed doesn’t respond by raising rates again.
Powell nodded to both concerns in his remarks. Financial conditions, including lending standards and borrowing rates, have tightened broadly in a way that typically slows down economic activity. Labor market imbalances have eased.
Powell sounded “like a man who thinks he is probably done raising rates and sees a stern tone as providing hawkish aircover for shifting gradually” to a strategy of holding rates at current levels as inflation declines, said Krishna Guha, vice chairman of Evercore ISI.
At the same time, Powell indicated “he is serious about not giving up the extra hike option now given the growth bounce,” he said.
After this speech, investors in interest-rate futures markets saw a nearly 20% chance that the Fed would raise rates at its next meeting, Sept. 19-20, but the probability of an increase at either of the Fed’s meetings in November and December edged up to around 50%, according to CME Group.
Inflation has retreated from a 40-year high last summer, with the consumer-price index climbing 3.2% in July from a year earlier. That is well below the recent peak rate of 9.1% in June 2022.
Core prices, which exclude volatile food and energy categories, increased just 0.2% in both June and July, extending a broader slowdown in price pressures.
“Two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell said. “There is substantial further ground to cover.”
Last year, Powell delivered an unusually brief address that promised to bring down inflation even at the cost of a recession. The speech jolted investors out of thinking the Fed saw a shorter and painless path to fighting inflation.
Powell echoed some of those themes in a more nuanced speech on Friday. He explicitly rejected any idea that the Fed would change its 2% inflation target.
He also acknowledged uncertainty about just how high rates needed to rise to provide enough economic restraint. Inflation-adjusted interest rates have risen to historically high levels, putting them “well above mainstream estimates” of the so-called neutral rate that neither spurs nor slows economic activity, Powell said.
“But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint,” he said.
Reference:
Nick Timiraos. 25 Aug 2023, Powell Says Fed Will ‘ Proceed Carefully’ on Further Rate Rises, The Wall Street Journal. https://www.wsj.com/economy/central-banking/powell-says-fed-will-proceed-carefully-on-any-further-rate-rises-31b6fc6a?mod=finance_lead_story
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