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Jay Powell warned that inflation “remains too high,” increasing the likelihood of further rate hikes if price pressures persist.
In a much-anticipated speech on Friday, the Fed chairman sounded hawkish, saying the central bank was prepared to maintain “restrictive” policy in the final stretch of unwinding the world’s worst inflation shock. decades.
“While inflation has come off its peak — a welcome development — it remains too high,” Powell told the Fed’s annual economic symposium in Jackson Hole, Wyoming.
“We are prepared to raise rates further as appropriate and intend to keep policy at restrictive levels until we are confident that inflation is falling sustainably to meet our objectives,” he added.
Powell pledged that the central bank would “exercise caution in deciding whether to tighten monetary policy further or leave policy rates unchanged pending further data”.
Since March 2022, the Fed has raised its benchmark policy rate from near zero to a range of 5.25% to 5.5%.
While Powell said the full impact of past rate hikes has yet to materialize and could represent a “further serious drag,” he said the Fed is watching the upside risks to inflation.
“Increasing evidence that sustained above-trend economic growth could put further increases in inflation at risk and may require further tightening of monetary policy,” he said, adding that “substantial further steps are needed to restore price stability.” work to be done”.
The Fed faces a daunting task in the coming months, starting with determining whether officials need to raise the benchmark policy rate above its current 22-year high. It must then decide how long to keep rates high before considering any rate cuts.
The central bank is widely expected to forego another rate hike at its next policy meeting in September. Some market participants expect the Fed to eventually raise interest rates by 25 basis points at its meeting in late October. No rate cut is expected until 2024.
Powell reiterated that bringing inflation back down to target would require not only a period of “subtrend economic growth,” but also “some softening of labor market conditions.”
His comments reiterated a message he sent at last year’s Jackson Hole symposium, when he said the Fed was determined to “hold on until the job is done.”
Powell’s warning on Friday comes at a worrying time for financial markets, which have recently struggled to digest a recent spike in U.S. borrowing costs. Adjusted for inflation, the “real” yield on the benchmark 10-year Treasury note is currently hovering at its highest point in more than a decade. Mortgage rates also soared.
While the debate over more immediate policy action appears far from settled, officials are more consistent that getting inflation back to the Fed’s 2% target will be a slow process that will likely require the central bank to keep inflation elevated for some time. base rate. longer period.
Economists say this “secular higher” approach is reinforced by the fact that the so-called neutral rate (R-star) — the level that neither stimulates nor depresses economic growth — is higher than has been possible in the past.
Economists see stronger-than-expected growth, ballooning government deficits and an acceleration in domestic manufacturing and green technology investment fueling growth, rather than a swift retreat into the era of ultra-low interest rates that dominated the aftermath of the global financial crisis. Borrowing costs continue to rise.
Powell did not discuss the prospect of a higher R-star on Friday, but said: “We cannot determine the neutral rate, so there is always uncertainty about the precise extent of monetary policy constraints.”