Powell Says Fed Will ‘Proceed Carefully’ on Any Further Rate Rises
Fed chair notes economy hasn’t cooled as expected and says signs of more strength could warrant additional action
By Nick Timiraos, The Wall Street Journal, Updated Aug. 25, 2023
JACKSON HOLE, Wyo.—Federal Reserve Chair Jerome Powell cautioned that past interest-rate increases had yet to fully slow the economy, an argument for holding rates steady for now, even though stronger and sustained growth could require higher rates to keep inflation declining. [end quote]
Here is Mr. Powell’s speech.
Speech
August 25, 2023
Inflation: Progress and the Path Ahead
Chair Jerome H. Powell
…
It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak—a welcome development—it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective…
…
On a 12-month basis, core PCE inflation peaked at 5.4 percent in February 2022 and declined gradually to 4.3 percent in July 2023 (figure 1, panel B). The lower monthly readings for core inflation in June and July were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal. We can’t yet know the extent to which these lower readings will continue or where underlying inflation will settle over coming quarters. Twelve-month core inflation is still elevated, and there is substantial further ground to cover to get back to price stability…
But we are attentive to signs that the economy may not be cooling as expected. So far this year, GDP (gross domestic product) growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust. In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up. Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy…
Two percent is and will remain our inflation target. We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to that level over time. It is challenging, of course, to know in real time when such a stance has been achieved. There are some challenges that are common to all tightening cycles. For example, real interest rates are now positive and well above mainstream estimates of the neutral policy rate. We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation. But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint…
As is often the case, we are navigating by the stars under cloudy skies. … [end quote]
This is a firm answer to anyone who thinks the Fed has done enough and should start loosening policy. The market has repeated been premature in its expectations. Mr. Powell has been clear about his determination from the beginning of the Fed’s rate raising cycle in 2022.
The options market now predicts that the fed funds rate will be constant or perhaps higher until 1Q24. The market doesn’t split evenly on higher or lower rates until May 2024.
Wendy
