July 11, 2024

Fed Chair Powell Stresses Vigilance on Inflation: ‘We’re Ready to Raise Rates Further

Image Credits: Nathan Howard

In a notable address, Federal Reserve Chair Jerome Powell expressed concern over persistently high inflation and warned that further interest rate hikes could be on the horizon. At the Kansas City Fed annual retreat in Jackson Hole, Wyoming, Powell stressed the need for vigilance in the ongoing battle against inflation.

While acknowledging some progress, Powell emphasized that inflation remains uncomfortably high, prompting the Fed to consider additional rate hikes. He clarified that the central bank would maintain a flexible stance but provided little indication of an imminent monetary policy easing.

“Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell stated. “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.”

Powell’s remarks echoed his warnings from the previous year, where he had cautioned about the likelihood of some economic discomfort while tackling rising inflation. Despite some recent positive financial data, Powell remains cautious. He noted that while inflation has slightly decreased from its peak, it’s still above the desired level. The Fed plans to maintain a restrictive monetary policy until they are confident that inflation is sustainably moving toward their 2% target.

This address echoed Powell’s warnings from the previous year, where he braced the public for some economic discomfort as the Fed worked to rein in inflation. However, the inflation situation has remained challenging, with the recent months showing only modest improvements, according to the Bureau of Labor Statistics.

Powell acknowledged the delicate balance of risks, emphasizing the dangers of acting too aggressively and not taking sufficient action. He likened the current economic situation to navigating under uncertain conditions, saying, “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.”

In response to Powell’s speech, financial markets initially experienced volatility, but stocks rebounded later in the day, and Treasury yields mainly increased. Compared to the previous year’s speech, Powell struck a more balanced tone, seen as a positive sign by market analysts.

“Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment,” he said. “Doing too much could also do unnecessary harm to the economy.”

The Fed has already implemented 11 interest rate hikes, bringing its key interest rate to its highest level in over two decades. The Fed also reduced its balance sheet substantially, allowing almost $960 billion worth of bonds to roll off since June 2022.

According to current trends, market expectations for the upcoming September meeting suggest little chance of another rate hike but a 50-50 probability for a final increase in November. Powell, however, needed to provide a clear signal on the future direction of rates.

While he remains cautious, Powell did not hint at the possibility of a rate cut. He suggested that economic growth might need to slow down before the Fed considers changing course.

Despite steady economic growth and strong employment figures, Powell emphasized the Fed’s commitment to carefully assessing incoming data and risks in future meetings. He noted that they are prepared to act based on the evolving economic outlook.

In a departure from last year’s brief speech, Powell delved into more details about the Fed’s approach to inflation. He emphasized the importance of core inflation, excluding volatile food and energy prices, and reiterated the Fed’s reliance on the personal consumption expenditures price index.

Powell also addressed political considerations, rejecting calls to raise the Fed’s 2% inflation target. This stance garnered criticism from some quarters, but Powell remains committed to the existing mark.

Regarding the natural interest rate, Powell emphasized the difficulty of precisely identifying it and acknowledged the uncertainty surrounding the level of monetary policy restraint.

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