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Fed chair lays out the 'unfortunate costs of reducing inflation'
02:17 - Source: CNN
Washington, DC CNN —
Additional interest rate hikes are still on the table and rates could remain elevated for longer than expected, Federal Reserve Chair Jerome Powell said Friday.
Delivering a highly anticipated speech at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, Powell again stressed that the Fed will pay close attention to economic growth and the state of the labor market when making policy decisions.
“Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell said. “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.”
The Fed chief’s annual presentation at the symposium, which has become a major event in the world of central banking, typically hints at what to expect from monetary policy in the coming months.
Powell’s speech wasn’t a full-throated call for more rate hikes, but rather a balanced assessment of inflation’s evolution over the past year and the possible risks to the progress the Fed wants to see. He made it clear the central bank is retaining the option of more hikes, if necessary, and that what Fed officials ultimately decide will depend on data.
US stocks opened higher before Powell’s speech, tumbled in late morning trading and then rose again.
The Fed raised its benchmark lending rate by a quarter point in July to a range of 5.25-5.5%, the highest level in 22 years, following a pause in June. Minutes from the Fed’s July meeting showed that officials were concerned about the economy’s surprising strength keeping upward pressure on prices, suggesting more rate hikes if necessary. Some officials have said in recent speeches that the Fed can afford to keep rates steady, underscoring the intense debate among officials on what the Fed should do next.
Financial markets still see an overwhelming chance the the Fed will decide to hold rates steady at its September meeting, according to the CME FedWatch tool, given that inflationary pressures have continued to wane.
Here are some key takeaways from Powell’s speech.
The Fed wants “below-trend growth”
Chair Powell said there is still a risk that inflation won’t come down to the Fed’s 2% target as the central bank faces the proverbial last mile in its battle with higher prices.
“Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Powell said.
Concerns over the economy running too hot for the Fed’s comfort only recently emerged.
Economic growth in the second quarter picked up from the prior three-month period and the Atlanta Fed is currently estimating growth will accelerate even more in the third quarter.
That could be a problem for the Fed, since the central bank’s primary mechanism for fighting inflation is by cooling the economy through tweaking the benchmark lending rate.
Generally, if demand is red hot, employers will want to hire to meet that demand. But many firms continue to have difficulty hiring, according to business surveys from groups such as the National Federation of Independent Business. In theory, that could prompt wage increases in order to secure talent — and those higher costs could then be passed on to consumers.
“if you’re a policymaker, you’re looking at the level of output relative to your estimate of what’s sustainable for maximum employment and 2% inflation,” William English, finance professor at Yale University who worked at the Fed’s Board of Governors from 2010 to 2015, told CNN. “So what does that mean for monetary policy? That may mean that they need rates to be higher for longer than they thought to get the economy on to that desirable trajectory, but there are a lot of questions around that force, and a lot of uncertainty.”
Cleveland Fed President Loretta Mester is one of the Fed officials backing a more aggressive stance on fighting inflation.
“We’ve come come a long way, but we don’t want to be satisfied, because inflation remains too high — and we need to see more evidence to be assured that it’s coming down in a sustainable way and in a timely way,” Mester said in an interview with CNBC after Powell’s remarks.
Meanwhile, some other officials think there will eventually be enough restraint on the economy and that more hikes could cause unnecessary economic damage. The lagged effects of rate hikes on the broader economy are a key uncertainty for officials, since it’s not clear when exactly those effects will fully take hold. Research suggests it takes at least a year.
“We are in a restrictive stance in my view, and we’re putting pressure on the economy to slow inflation,” Philadelphia Fed President Patrick Harker told Bloomberg in an interview Friday after Powell’s speech. “What I’m hearing — and I’ve been around my district all summer talking to people — is ‘you’ve done a lot very quickly.’”
Acknowledging progress on inflation
Powell pointed to the steady progress on inflation in the past year: The Fed’s preferred inflation gauge — the Personal Consumption Expenditures price index — rose 3% in June from a year earlier, down from the 3.8% rise in May. The Commerce Department officially releases July PCE figures next week, though Powell already previewed that report in his speech. He said the Fed’s favorite inflation measure rose 3.3% in the 12 months ended in July.
The Consumer Price Index, another closely watched inflation measure, rose 3.2% in July, a faster pace than the 3% in June, though underlying price pressures continued to decelerate that month.
In his speech Friday, Powell stood firmly by the Fed’s current 2% inflation target, which was formalized in 2012 — at least for now. The Fed is set to review its policy framework around 2025, which could be an opportunity to establish a new inflation target.
Harvard economist Jason Furman said in an op-ed published in The Wall Street Journal this week that the central bank should aim for a different inflation goal, which could be something slightly higher than 2% or even a range of between 2% and 3%.
For now, Powell has made it clear he is sticking with the stated inflation target.
Still, inflation’s progress has hyped up not only American consumers and businesses, but also some Fed officials.
Chicago Fed President Austan Goolsbee reiterated to CNBC Friday that he still sees “a path to a soft landing,” a scenario in which inflation falls down to target without a spike in unemployment or a recession.
An economy more resistant to monetary policy?
Powell also weighed in on an ongoing debate among economists about whether the “neutral rate of interest,” also known as r*, is higher since the economy is still on strong footing despite the Fed’s aggressive pace of rate hikes.
In theory, the neutral rate is when real interest rates neither restrict nor stimulate growth. The Fed chair said higher interest rates are likely pulling on the economy’s reins, implying that r* might not be structurally higher, though he said it’s an unobservable concept.
“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,” Powell said.
Either way, while the Fed chief hinted that more rate hikes might be coming down the pike, there’s no guarantee either way.
The Fed paused its historic inflation fight for the first time in June, mostly based on uncertainty over how the spring’s bank stresses would affect lending. The central bank could decide to pause again in September over uncertainty as it waits for more data.
“We think that the Fed is more likely to take a wait-and-see approach with the data and try to understand a little bit more about why the labor market is remaining so strong, even despite the inflationary experience that we’ve had and the higher interest rates in the economy,” Sinead Colton Grant, head of BNY Mellon investor solutions, told CNN in an interview.