Powell’s New Directions: Higher Rates Longer to Beat Inflation

Federal Reserve Chairman Jerome Powell has signaled that the US central bank will likely continue to raise interest rates and leave them high for some time to stamp out inflation, and he pushed back on any notion that the Fed would soon back down.

“Restoring price stability will likely require tight policy to continue for some time,” Powell said Friday in prepared remarks for the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record strongly cautions against premature policy easing.”

He said getting inflation back to the 2% target is “the central bank’s overriding objective right now,” even though consumers and businesses will feel economic pain. He reiterated that another “unusually large” increase in the benchmark lending rate may be appropriate when officials meet next month, although he refrained from committing to it.

“Our decision at the September meeting will depend on the totality of incoming data and the evolution of the outlook,” he said.

Two-year Treasury yields rose as investors digested the remarks, rising to 3.44% as the 2-10-year yield curve resumed its flattening. Stocks were down.

Prior to Powell’s speech, investors viewed the odds of a half-point or three-quarter-point hike at the Fed’s Sept. 20-21 meeting as roughly equal. They remained in that neighborhood after his speech, but the amount of federal rate cuts set for 2023 briefly retreated.

Mark Spindel, chief investment officer at MBB Capital Partners, said the resolute tone of Powell’s speech points to another big rate hike next month.

“Not backing this up with another 75 basis point increase would cheapen his speech,” Spindel said, noting that Powell went to the trouble of quoting former chairmen Alan Greenspan, Paul Volcker and Ben Bernanke, invoking the Temple of the reputation of the Fed to reinforce its message.

“Restoring price stability will take time and will require using our tools forcefully to balance supply and demand,” Powell said in remarks that were to be broadcast live for the first time from inside the lodge. where the event took place. since 1982.

Other Fed speakers in recent days have also pushed back on expectations that the Fed will quickly increase tight policy and then start to ease.

Restoring price stability will require a “sustained” period of below-trend growth and a weaker labor market, Powell said. “While higher interest rates, slower growth and looser labor market conditions will reduce inflation, they will also hurt households and businesses,” he said.

Powell’s remarks at the retreat, which brings together top policymakers from around the world, come as US central bankers face the highest inflation in 40 years. Officials have been slow to spot the risk and are now acting aggressively to prevent prices from accelerating further. Officials raised rates by 75 basis points in their last two meetings and signaled that the same could be on the table again when they meet next month.

Critics criticized the Fed for failing to anticipate the inflationary surge, which the Fed initially viewed as transitory. Powell told the conference in his address a year ago that price pressures were limited to a relatively small group of goods and services. But within months it spread, and by the time the Fed began raising rates from near zero, inflation was already three times its 2% target.

It remains high: While the Fed’s preferred measure of inflation fell to 6.3% for the 12 months ending in July, wages and salaries recorded the largest monthly increase since February, according to a report from the government published earlier on Friday.

“While July’s inflation drop is welcome, the single-month improvement is well below what the committee will need to see before we are confident inflation is falling,” the chief said. from the Fed to the public, meeting in person after two years. to hold the conference virtually due to the pandemic.

“We are deliberately moving our policy to a level that will be restrictive enough to bring inflation down to 2%.”

In June, Fed officials expected rates to rise to 3.4% by the end of this year, according to their median estimate, and 3.8% by the end of 2023. They will update these forecasts in September. Investors were pricing in the likelihood of cuts in the second half of 2023, although Fed officials are beginning to argue against that view.

Beyond the current rate hike cycle, policymakers are trying to assess whether longer-term inflationary pressures will remain persistent. Supply chain costs could rise and the U.S. labor supply could remain tight for years due to an aging population and limited immigration.

Powell said the labor market is “clearly out of balance” with demand for workers “substantially” outstripping supply.

The U.S. unemployment rate hit a five-decade low of 3.5% in July, with payrolls fully returning to pre-pandemic levels.

Ahead of Powell’s speech, several Fed officials stressed that the central bank was by no means finished, with Kansas City Fed Chief Esther George noting that the destination of the fed funds rate could be higher. than current market prices.

“We need to raise interest rates to slow demand and bring inflation back to our target,” said George, who votes on monetary policy this year.

In financial markets, the benchmark lending rate peaks at less than 4% early next year.

Asked how high the Fed should raise borrowing costs, George said there was “more wiggle room” and pushed back on bets in financial markets that the central bank would start cutting rates l ‘next year.

“I think we will have to hold on – it could be above 4%. I don’t think that’s out of the question,” she said in an interview with Bloomberg Television. “You won’t know, I think, until you start observing the signs of data.”

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