(Bloomberg) – Federal Reserve Chairman Jerome Powell has signaled that the US central bank is likely to continue raising interest rates and leave them high for a while to quell inflation and he has dismisses any suggestion that the Fed will reverse course soon.
Most read from Bloomberg
“Restoring price stability will likely require maintaining a restrictive policy stance for a while,” Powell said Friday in remarks prepared for the Fed’s annual policy forum. in Kansas City in Jackson Hole, Wyoming. “The historical record strongly warns against easing policy too soon.”
He said restoring inflation to the 2% target was the central bank’s “overarching focus right now” although consumers and businesses would feel the economic pain. He reiterated that another “unusually large” increase in the benchmark lending rate may be relevant when officials gather next month, although he has stopped short of committing.
“Our decision at the September meeting will depend on the total amount of data coming in and the outlook for development,” he said.
Two-year Treasury bond yield. edged higher as investors understood the comments, pushing as high as 3.44% while the 2- to 10-year yield curve continued to flatten. Lower equity.
“In a nutshell: Nothing for pigeons,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note to clients. “The Fed cannot ease until inflation is back on target, and wage growth has slowed markedly. The President’s message today is that the Fed thinks these conditions are unlikely to be met as soon as markets expect.”
Prior to Powell’s speech, investors had seen the odds of a half-point or another three-quarter point rise at the Fed’s September 20-21 meeting as roughly even. They were still in that vicinity after he said, but the feeding discount for 2023 has since retreated for a while.
Strong action
“Restoring price stability will take some time and will require using our tools aggressively to bring supply and demand into a better balance,” Powell said in the streamed comment. for the first time from inside the motel where the event was held. since 1982.
Other Fed speakers in recent days have also pushed back on expectations that the Fed will quickly raise its restrictive policy stance and then begin easing.
Restoring price stability will require a period of “sustainable” below-trend growth and a weaker labor market, Powell said. “While higher interest rates, slower growth, and softer labor market conditions will reduce inflation, they will also cause some hardship for households and businesses,” he said.
Powell’s remarks at the retreat, which brought together top policymakers from around the world, came as US central banks face the highest inflation in 40 years. Officials have been slow to recognize the risk and are now actively moving to keep prices from rising any further. Officials raised interest rates by 75 basis points in their last two meetings and signaled the same could be brought out again when they rallied next month.
Critics have criticized the Fed for not anticipating a rise in inflation, which the Fed initially considered transitory. Powell told the conference in his keynote a year ago that price pressures are limited to a relatively narrow group of goods and services. But within months, it was widespread, and by the time the Fed started raising rates from near-zero inflation was already tripling their 2% target.
It remains high: While the Fed’s preferred measure of inflation fell to 6.3% in the 12-month period ending in July, wages and salaries posted their biggest monthly gains since February , according to a government report published earlier on Friday.
“While lower inflation readings for July are welcome, a month’s improvement is not far from what the committee will need to see before we are confident that inflation will ease,” said the director. Fed governor told the audience, collected live two years after holding the conference mostly because of the pandemic.
“We are purposefully shifting our policy stance to a level that is restrained enough to bring inflation back to 2%.”
Fed officials in June expected interest rates to rise to 3.4% by the end of the year, according to their median estimate, and 3.8% by the end of 2023. They will update those forecasts. in September. Investors are pricing in the possibility of a cut in the second half of 2023, though Fed officials are starting to counter that view.
Looking beyond the current rate hike cycle, policymakers are trying to gauge whether long-term inflationary pressures will persist. Supply chain costs are likely to be higher, and the U.S. labor supply is likely to remain tight for years to come due to an aging population and limited immigration.
Powell said the labor market is “clearly out of balance” with demand for workers “essentially” outstripping supply.
The US unemployment rate matched a five-decade low of 3.5% in July with payrolls fully recovering to pre-pandemic levels.
Ahead of Powell’s speech, several Fed officials had insisted that the central bank would do nothing else, with Kansas City Fed Director Esther George noting that the destination of the federal funds rate has may be higher than currently priced markets.
“We have to raise rates to reduce demand and bring inflation back to our target,” said George, who voted on monetary policy this year.
Financial markets have benchmark lending rates peaking below 4% early next year.
When asked how the Fed should push up borrowing costs, George said there was “more room to go” and pushed back against bets in financial markets that the central bank would start cutting interest rates. rate next year.
“I think we will have to hold – it could be more than 4%. I don’t think that’s out of the question,” she said in a Bloomberg Television interview. “I think you won’t know that until you start looking at the data signatures.”
Most read from Bloomberg Businessweek
© 2022 Bloomberg LP
