Uncertainty over the economic outlook was also underscored by Federal Reserve Chairman Jerome Powell’s statement on Friday in a closely watched speech that the continued strength of the U.S. economy may warrant further rate hikes.
Powell pointed out that the economic growing faster than expected Consumers have been spending strongly — a trend that could keep inflationary pressures high. He reiterated the Fed’s determination to keep its benchmark interest rate elevated until inflation falls to its 2 percent target.
“We are watching for signs that the economy may not be cooling as expected,” Powell said. “We are prepared to raise rates further, if appropriate, and intend to keep policy at a restrictive level until we are confident that inflation will continue to decline to achieve Our goal.”
“While inflation has come down from its peak – a welcome development – it remains too high.”
Powell’s speech at the annual meeting of central bankers in Jackson Hole, Wyoming, underscored the uncertainty surrounding the economy and the complexity of the Fed’s response to it. That was in stark contrast to his comments a year ago, when he bluntly warned that the Fed would continue to raise interest rates aggressively to stem soaring prices.
“When it comes to raising rates again, the chairman still has his finger on the trigger, albeit less than last year,” said Omair Sharif, chief economist at Inflation Insights.
A direct result of the Fed’s rate hikes has been a sharp rise in lending rates, making it harder for Americans to afford homes, cars and businesses to finance expansion. At the same time, items like rent, restaurant meals and other services remain more expensive. “Core” inflation, which excludes volatile food and energy prices, remains high despite the Fed’s 11 consecutive rate hikes starting in March 2022.
Still, the overall economy remains robust. Hiring Stay Healthyconfounding economists who had predicted that a surge in interest rates would lead to Mass layoffs and recession.expenditures maintain a healthy rate of growth. The U.S. unemployment rate is exactly where it was when Powell spoke last year: 3.5%, just above a half-century low.
Diane Swonk, chief economist at KPMG, said: “He’s still very concerned about the pace of growth because that really means that, all else being equal, we need higher rates of growth. interest rates to limit.”
In his speech, Powell made no mention of the possibility of an eventual rate cut by the Fed. Earlier this year, many on Wall Street expected a rate cut early next year. Most traders now don’t expect a rate cut until mid-2024 at the earliest.
Powell said central bank policymakers are confident their key interest rates are strong enough to restrain the economy and cool growth, employment and inflation.but he admitted it was It’s hard to know how expensive it is to borrow The Fed’s policy must be to slow economic growth, “so there is always uncertainty” about how effective the Fed’s policy will be in reducing inflation.
Fed officials “will proceed with caution in deciding whether to tighten further or hold policy rates on hold pending further data,” he said.
Since Powell’s speech at Jackson Hole last summer, the Fed has raised its benchmark interest rate to a 22-year high of 5.4%.From a peak of 9.1% in June 2022, inflation has slowed to 3.2%although still above the Fed’s 2% target.
Powell acknowledged the decline in inflation, which he called “very good news.” Consumer prices, which exclude the volatile food and energy categories, have started to moderate.
“But two months of good data,” he added, “is just the start of building confidence that inflation will continue to decline and we will achieve our objective.”
In June, when the Fed’s 18 policymakers last issued their quarterly forecasts, they expected another rate hike this year. However, that expectation could change given the more dovish inflation data released by the government in recent weeks. Officials are due to update their rate forecasts when they next meet on Sept. 19-20.
Some Fed officials, including John Williams, president of the New York Fed and a senior member of the rate-setting committee, said the central bank may be close to raising interest rates.
Many economists have Delayed or reversed previous forecasts of U.S. recession.Optimism that the Fed will achieve Difficult “soft landing” — which would seek to bring inflation down to target without causing a deep recession — has risen.
many traders in financial markets Not only to achieve a soft landing, but also to accelerate growth. Those expectations have fueled a surge in bond yields, especially the 10-year Treasury note, which has a big impact on long-term mortgage rates. As a result, the average fixed rate on a 30-year mortgage has reached 7.23%, Highest level in 22 years. Interest rates on auto loans and credit cards have also risen sharply, threatening to dent borrowing and consumer spending, the lifeblood of the economy.
Emily Roland, co-chief investment strategist at John Hancock Investment Management, is among analysts who remain skeptical the Fed will be able to pull off a soft landing.
“The lagged impact of all the tightening the Fed has done — the largest tightening we’ve seen in decades — could weaken the economy and push it into recession,” she said. “It’s just going to take a while to get there .”
Likewise, Sonia Meskin, head of U.S. macro at BNY Mellon Investment Management, said she was concerned that financial markets were “underestimating the likelihood of a tougher, delayed landing.”
Meskin said “much of the tightening is likely still in the pipeline” and that the full impact of the rate hikes may not be felt until next year.
Some economists said they believed a sharp rise in long-term interest rates in the bond market could reduce the need for further rate hikes by the Fed, because by slowing economic growth, those long-term rates should help ease inflationary pressures.In fact, many economists say they think Fed’s July rate hike will prove to be last.
Even if the Fed refrains from further rate hikes, it may still feel the need to keep its benchmark rate high for a long time to come in an attempt to rein in inflation. That would create a new threat: Keeping interest rates high indefinitely could weaken the economy and even trigger a recession. It could also endanger many banks by reducing the value of the bonds they own — a dynamic that contributed to the collapse of Silicon Valley Bank and two other large banks last spring.
Associated Press economics writer Paul Wiseman in Washington contributed to this report.