(Bloomberg) — Federal Reserve Chairman Jerome Powell has signaled the U.S. central bank should continue to raise interest rates and leave them high for a while to curb inflation, and brushed off any idea that the Fed would soon reverse course.
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“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in prepared remarks for the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record strongly cautions against premature loosening of the policy.”
He said restoring inflation to the 2% target was the central bank’s “overarching focus now”, even though consumers and businesses felt economic problems. He reiterated that another “extraordinarily large” hike in the prime rate could be appropriate when officials meet next month, although he has not committed to one.
“Our decision at the September meeting will depend on the totality of the data received and the evolution of the outlook,” he said.
Two-year Treasury yields. it rose as investors digested the remarks, reaching 3.44% as the 2-10-year yield curve resumed its flattening. Stocks were lower.
“In one line: nothing for doves,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note to clients. “The Fed cannot relax until inflation is clearly returning to target, and wage growth has slowed sharply. The president’s message today is that the Fed believes these conditions are unlikely to be met as soon as markets expect.”
Prior to Powell’s speech, investors viewed the odds of a half-point or another three-quarter-point increase at the Sept. 20-21 Fed meeting as roughly equal. They stayed in that neighborhood after he spoke, but the amount of Fed rate cuts for 2023 briefly eased.
“Restoring price stability will take some time and will require us to forcefully use our tools to balance demand and supply,” Powell said in comments that were timed to be broadcast live for the first time from inside the lodge where the event was held. since 1982.
Other Fed speakers in recent days have also reacted against expectations that the Fed would quickly rise to a restrictive policy stance and then begin to relax.
Restoring price stability will require a “sustained” period of below-trend growth and a weaker labor market, Powell said. “While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring some problems for households and businesses,” he said.
Powell’s remarks at the retreat, which brings together top policymakers from around the world, come as US central bankers face their highest inflation in 40 years. Authorities were slow to identify the risk and are now moving aggressively to prevent prices from accelerating further. Officials raised rates by 75 basis points in their last two meetings and signaled that the same could be on the table again when they meet next month.
Critics criticized the Fed for not anticipating the rise in inflation, which the Fed initially considered transitory. Powell told the conference in his speech a year ago that price pressures were limited to a relatively narrow group of goods and services. But within a few months it was spreading and by the time the Fed started raising inflation rates close to zero it was already three times its 2% target.
Remains high: While the Fed’s preferred measure of inflation eased to 6.3% in the 12-month period ending in July, wages and salaries saw their biggest monthly gain since February, according to a government report released on Friday. .
“While the lower inflation readings for July are welcome, the single-month improvement falls far short of what the committee will need to see before we can be sure that inflation is falling,” the Fed chief told the audience, reunited in person after two years. to hold the conference virtually because of the pandemic.
“We are purposefully shifting our policy stance to a level that will be sufficiently restrictive to return inflation to 2%.”
Fed officials in June projected rates rising to 3.4% by the end of this year, according to their median estimate, and 3.8% by the end of 2023. They will update those forecasts in September. Investors were pricing in the likelihood of cuts in the second half of 2023, although Fed officials are starting to oppose that view.
Looking beyond the current rate hike cycle, policymakers are trying to gauge whether long-term inflationary pressures will remain persistent. Supply chain costs could be rising, and the US labor supply could remain tight for years to come due to an aging population and limited immigration.
Powell said the labor market is “clearly unbalanced” with demand for workers “substantially” exceeding supply.
The US unemployment rate hit a five-decade low of 3.5% in July as payrolls fully recovered to pre-pandemic levels.
Prior to Powell’s speech, several Fed officials stressed that the central bank is not ready, with Kansas City Fed Chief Esther George noting that the fate of the federal funds rate could be higher than markets currently price.
“We have to raise interest rates to slow demand and bring inflation back to our target,” said George, who votes on monetary policy this year.
Financial markets have the benchmark lending rate peaking below 4% early next year.
Asked how far the Fed should raise borrowing costs, George said there was “more room to go” and backed off against bets in financial markets that the central bank would start cutting rates next year.
“I think we will have to hold on – it could be more than 4%. I don’t think that’s out of the question,” she said in an interview with Bloomberg Television. “You won’t know that, I think, until you start watching the data signals.”
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