JACKSON HOLE, Wyoming, Aug. 25 (Reuters) – Federal Reserve Chairman Jerome Powell said on Friday that the Fed will likely raise interest rates further to curb inflation that is still too high. He said it might be necessary and promised to act cautiously at future meetings. Progress has been made in easing price pressures and mitigating risks from the surprising strength of the US economy.
While not quite as hawkish as his message at the annual Jackson Hole economic policy symposium a year ago, Powell’s remarks still pack a punch, and investors are now on hold until the end of the year. I think the odds of one more rate hike in 2020 are increasing.
“We will be making a cautious decision on whether to tighten further or keep the policy rate on hold and wait for more data,” Powell said in his keynote address. “It’s the Fed’s job to get inflation down to its 2% target, and we’re going to do that,” he said.
The Fed has raised interest rates by 5.25 percentage points since March 2022, and the Fed’s preferred benchmark inflation rate has fallen to 3.3% from a peak of 7% last summer. Powell said the fall was a “welcome development” but that inflation was “still too high”.
“We are ready to raise rates further if appropriate and will keep policy at a restrained level until we are confident that inflation is steadily falling toward our target,” he said.
But Powell said that above-trend growth was “inflationary”, given “signs that the economy may not have cooled as expected”, including “particularly strong” consumer spending and a “possible recovery” in the housing sector. It could put further progress at risk, and it could be justified.” Further monetary policy tightening. ”
While some believe that inflation is slowing significantly without costing the economy much, his remarks show that the Fed is grappling with conflicting signals from the economy, which is a good thing. As a result, it raises the possibility that Fed policy is not restrictive enough to complete its mission. .
Unlike his speech last year at a high-profile conference hosted by the Kansas City Fed (a brief warning of further tightening ahead), Mr. Powell did not warn households that further tightening would cause “pain” for households.
But he didn’t suggest a rate cut was imminent or nod as some policymakers do about the need to cut rates if inflation cools more persistently.
“Finger on the Trigger”
At the end of the day, futures contracts tracking the Fed’s policy rate priced in a slightly less than 20% chance of a September rate hike, but more than a 50% chance that the policy rate would end the year at 5.5%. . The range is 5.75%, a quarter of a point higher than the current range. Fed policymakers will meet again in November and December.
[1/3]Federal Reserve Chairman Jerome Powell speaks at a press conference after the Federal Open Market Committee’s two-day closed session on interest rate policy on July 26, 2023 in Washington, USA.Reuters/Elizabeth Franz Acquisition of license rights
Yields on two-year bonds ended the day at 5.08%, the highest since June 2007.
“My main lesson is that the Fed chairman is still holding the trigger when it comes to raising interest rates again, albeit a little less than last year,” said Omer Sharif of Inflation Insights.
Powell said it would be difficult to know exactly how much the current base rate is above the “neutral” rate, so it would be difficult to assess how much restraint the Fed is imposing on growth and inflation. said it was difficult.
Powell reiterated what has become the Fed’s standard diagnosis of rising inflation. Pandemic-era spikes in goods inflation have eased and a decline in housing inflation is ‘in progress’, but consumer spending on a wide range of services continues and inflation remains tight due to labor market conditions. , a return to 2% could be difficult.
Powell said recent declines in measures of underlying inflation, excluding food and energy prices, were “welcome, but two months of positive data provide confidence that inflation is continuing to decline.” It’s just the beginning we need to build.”
“Given the size” of the broader service sector, excluding housing, “more progress is essential,” he said, adding that a slowdown in the economy would likely be needed to achieve that.
“Restraint monetary policy is likely to play an increasingly important role,” Powell said. is expected to soften to some extent,” he said.
Powell’s tone wasn’t as harsh as last year, but in a series of very abrupt statements, the Fed is nearing the end of its rate-hiking cycle and dismissing the market’s view that it will cut rates later this year. Still, it was clear that he didn’t want to save any options.
“Powell continues to walk a tightrope,” said Michael Arone, chief investment strategist at State Street Global Advisors. “Isn’t it?” But he remains firm in the idea that they are watching closely and that there is still work to be done. ”
Other Fed policymakers expressed mixed views in interviews held on the sidelines of the meeting. “Maybe we have some work to do,” said Cleveland Fed President Loretta Mester.
Chicago Fed President Austan Goolsby felt the focus could shift from thinking about how high rates should go to thinking about how long to keep rates high.
Mr. Powell ended his speech on Friday with roughly the same words he used in his Jackson Hole speech last year: “We’ll keep doing it until the job is done.”
Reporting by Howard Schneider, Ann Saphir, and Michael S. Derby. Additional reporting by Lewis Krauskopf.Editing: Andrea Ricci
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