Jerome Powell, chairman of the Federal Reserve, pledged during a closely watched speech that his central bank would stick to its efforts to stamp out high inflation “until the job is done” and said officials stood ready to raise interest rates further if necessary.
Mr. Powell, speaking on Friday at the Fed’s annual Jackson Hole conference in Kansas City, Wyoming, said the Fed would “proceed with caution” when deciding whether to make further policy adjustments after a year and a half. which he spent and prompted interest rates to rise sharply.
But even as Mr. Powell emphasized that the Fed is trying to balance the risks of doing too much and hurting the economy more than necessary, against the risks of doing too little, he was careful not to rush into the recent slowdown in monetary policy. economic inflation. His speech highlighted one key point: Officials want to see more progress to convince them they have succeeded in controlling price increases.
“The message is the same: The Fed’s job is to bring inflation down to our 2 per cent target, and we will do it,” Powell said, comparing his rhetoric to the stern comments he made at Jackson Hole last year. gathering.
Central bankers raised interest rates to a range of 5.25 to 5.5 percent, from near zero in March 2022, in a bid to cool the economy and bring down inflation. They have kept open the possibility of another rate hike, and have been clear that they expect to leave interest rates high for some time.
Mr. Powell kept that message alive on Friday.
“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 the Fed chair noted that “at upcoming meetings we will be in a position to proceed cautiously as we assess incoming data, expectations and evolving risks,” and that officials “will decide whether to tighten policy further, or alternatively, to hold monetary policy.” “. The rate is stable and we await more data.”
This indicates that central bankers are not determined to raise interest rates at their next meeting in September. Alternatively, they may wait until later in the year I have a meeting In November and December – before deciding whether borrowing costs need to go up further. Taking a patient stance would give officials more time to assess the impact of the moves they have already made on the economy.
“I think this sets the stage for pausing the September meeting, and leaving their options open after that,” said Laura Rosner Warburton, chief economist at MacroPolicy Perspectives. “We are close to the top, we may be there, and they will tread carefully.”
Mr. Powell made it clear that the Fed was in no rush to raise interest rates again, but remained cautious about the risk of further inflation.
Rate increases have fallen significantly in recent months, to about 3 percent by the Fed’s preferred measure. This is still above the Fed’s inflation target of 2 per cent, although it is down sharply from the peak of 7 per cent last summer.
There are signs of stubbornness lingering beneath the surface. After excluding food and fuels for a look at the fundamental trend, the central bank’s preferred inflation measure is still on in about twice Fed target.
“The process still has a long way to go, even with the most positive recent readings,” Powell said. “We can’t yet know how long these lower readings will last or where core inflation will stabilize over the coming quarters.”
This is partly because the Fed is trying to assess how its policy adjustments will affect the economy and, through it, inflation.
The Fed’s higher borrowing costs have reduced demand for cars and homes by making auto loans and mortgages more expensive, and may be discouraging trade expansion and cooling the labor market.
But it is not clear how dangerous the Fed’s current policy is for the economy. Rates are well above the level most economists believe is necessary to keep the economy growing below its potential operating rate, but such estimates are subject to error.
“There is always uncertainty about the exact level of monetary policy constraints,” Powell admitted on Friday.
This is especially important in the face of recent economic data, which has been surprisingly strong. Consumers continue to spend and businesses continue to hire aggressively in the face of the Fed’s onslaught. The resilience has led some economists to warn of a risk that the economy will accelerate again, keeping inflation high.
“We are alert to signs that the economy may not calm down as expected,” Mr. Powell said. “Additional evidence of sustained above-trend growth could further jeopardize the advance in inflation and could warrant further tightening of monetary policy.”
However, Mr. Powell also emphasized that the economy may take time to react to policy moves that have already been made, and that conditions are unusual in the aftermath of a pandemic: for example, job opportunities fell by an extraordinary amount without raising unemployment.
“This uncertainty underscores the need for flexible policymaking,” he said.
However, Mr. Powell carefully avoided any suggestion that the Fed might ease inflation. It has shot down a growing round of speculation among economists that the Fed could – or should – raise its inflation target, which would make it easier to reach it.
“2% is and will remain our inflation target,” he said.
He ended his speech with the same sentence he used in closing his speech at a Jackson Hole rally last year, which was widely seen as an aggressive stance against inflation.
“We will continue to do so until the job is done,” he added.