Fed Powell: Raising rates may be needed, we will move ‘cautiously’

JACKSON HALL, Wyoming (Reuters) – Federal Reserve Chairman Jerome Powell said on Friday that the Federal Reserve may need to raise interest rates further to calm still-very high inflation, and pledged to take action. Cautiously in future meetings noting both things. Progress made in easing price pressures as well as risks from the sudden strength of the US economy.

Although the message was not as hawkish as he delivered this time last year at the annual economic policy symposium in Jackson Hole, Powell’s remarks are still a jab, with investors now seeing another rate hike by the end of the year as more likely than or not.

“We will tread carefully when deciding whether to further tighten monetary policy or, alternatively, to hold interest rates steady and wait for more data,” Powell said in a keynote address. “It is the Fed’s job to bring inflation down to our 2% target, and we will do it.”

The Fed has raised interest rates by 5.25 percentage points since March 2022, and inflation, the Fed’s preferred measure, has fallen to 3.3% from its peak of 7% last summer. Powell said that although the decline was a “welcome development,” inflation “remains very high.”

“We stand ready to raise interest rates further if appropriate, and intend to keep policy at a constrained level until we are confident that inflation is moving sustainably towards our target,” he said.

But with “signs that the economy may not be slowing as expected,” including “particularly strong” consumer spending and a “potential rebound” in the housing sector, Powell said above-trend growth “could jeopardize further progress in inflation and could to justify it.” Further tightening of monetary policy.

His comments showed the Fed grappling with mixed signals from an economy where inflation slowed significantly in some readings without significant cost to the economy – a good result, but raised the possibility that Fed policy is not constrained enough to complete the task. .

And unlike in last year’s speech at the closely watched conference hosted by the Kansas City Federal Reserve – a curt warning of further policy tightening to come – Powell did not mention the “pain” to households from further tightening.

But he also did not suggest that interest rate cuts were anywhere near, or point out, as some policymakers have, to the need to adjust interest rates lower once inflation subsides more sustainably.

“finger on the trigger”

At the end of the day, Fed rate futures were pricing in a less than 20% chance of a September rate hike, but a better than 50% chance of the rate ending the year at 5.5%. 5.75% range, a quarter of a point higher than the current range. The Fed’s decision makers are also scheduled to meet in November and December.

The yield on the two-year Treasury ended the day at 5.08%, its highest close since June 2007.

“The main takeaway I draw is that when it comes to another rate hike, the president still has his finger on the trigger, even if it’s less itchy than it was last year,” said Amir Sharif of Inflation Insights.

Powell said it is difficult to know precisely how high the current benchmark interest rate is above the “neutral” interest rate, and therefore difficult to assess the extent of the Fed’s constraints on growth and inflation.

Powell repeated what has become the Fed’s standard diagnosis of advancing inflation – with a pandemic-era jump in easing commodity inflation and a drop in housing inflation “in the pipeline”, but concern over continued consumer spending on a wide range of services and tightening monetary policy could make the labor market return to normal. 2% tough.

Recent declines in measures of core inflation, excluding food and energy prices, “were welcome, but two months of good data is only the beginning of what it will take to build confidence that inflation is moving downwards sustainably,” Powell said.

Given the size of the “broader services sector, excluding housing,” the Fed chief said, “some additional progress will be necessary,” and it will likely take an economic slowdown to make it happen.

“Restrictive monetary policy is likely to play an increasingly important role. Sustainably reducing inflation to 2% is expected to require a period of sub-trend economic growth as well as some slowdown in labor market conditions,” Powell said.

While Powell’s tone was not as stern as it was last year, when in a very surprising set of remarks he liberalized market perceptions that the Fed was nearing the end of its rate-raising cycle and would cut rates this year. However, it was clear that he did not want to put aside any options.

“Powell continues to walk the tightrope,” said Michael Aroni, chief investment strategist at State Street Global Advisors. “I think this year he’s shown he’s pleased with how far monetary policy has come and how inflation has been brought down. They still have work to do.

In interviews on the sidelines of the conference, other Fed policymakers expressed a range of views. “We probably have some work to do,” said Loretta Mester, president of the Cleveland Federal Reserve Bank.

Chicago Fed President Austan Goolsby said the focus could shift to figuring out how long interest rates will remain high, rather than how high they should be.

Powell ended his speech on Friday with the same line he ended last year in Jackson Hole: “We’re going to keep it going until the job is done.”

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