Fed President Powell calls inflation 'very high', warns 'We are ready to raise interest rates further' (2023)

Chairman of the Federal ReserveJerome'a ​​​​Powellaon Friday, he called for greater caution in the fight against inflation, warning that there could still be a further increase in interest rates.

Acknowledging that progress had been made and saying the Fed would be cautious about further decisions, the central bank chief said inflation was still above levels acceptable to policymakers. He noted that the Fed would remain flexible as it considers further action, but gave no indication that it would be ready to start easing policy anytime soon.

"Although inflation has come down from its peak - which is welcome - it is still too high," he added.Powell stated in prepared notesfor his speech at the annual meeting of the Kansas City Fed in Jackson Hole, Wyoming. "We stand ready to raise interest rates further, if necessary, and intend to keep policy at a firm level until we are confident that inflation is sustainably declining towards our target."

The speech recalled remarks Powell made last year in Jackson Hole, where he warned there would likely be "some pain" as the Fed continued its efforts to bring skyrocketing inflation back to its 2% target.

However, at that time inflation was well ahead of the current rate. Nonetheless, Powell indicated that it was too soon to claim victory, even though data this summer was mostly in favor of the Fed. According to the Bureau of Labor Statistics, the pace of price increases slowed in June and July, with core inflation that increased by 0.2% per month.

"The lower monthly core inflation readings in June and July were welcome, but two months of good data is just the start of what is needed to build confidence that inflation is steadily falling towards our target," he said.

Powell recognized that the risks are mutual, with the danger of doing too much and too little.

"Very little action could cause inflation to remain above target and ultimately require monetary policy to squeeze the most persistent inflation in a high-employment-cost economy," he said. "Doing too much can also cause unnecessary damage to the economy."

"As it often happens, under a cloudy sky we sailed alongside the stars," he added.

The markets were volatileafter the speech, but later in the day stocks rose and government bond yields mostly rose. In 2022, stocks fell after Powell's Jackson Hole speech.

"Has he been hawkish? Yes. However, given the recent uptick in profitability, he hasn't been as aggressive as some feared," said Ryan Detrick, chief market strategist at Carson Group. past and was much more aggressive than expected, resulting in strong sales in October. This time he hit more of the middle, with no major changes on future climbs, which was a welcome sign."

Powell's remarks follow a streak of 11 interest rate hikes that have brought the Fed's key rate within a target range of 5.25-5.5%, the highest level in more than 22 years. In addition, the Fed reduced its balance sheet to its lowest level in more than two years – as part of the process, approximately $960 billion in bonds have matured since June 2022.

Markets have recently priced in a slim chance of another rate hike at the Federal Open Market Committee's September meeting, but are pointing to a 50% chance of a final hike at the November meeting. Projections released in June showed that almost all FOMC members expect another rate hike this year.

Powell did not give a clear indication of which way he thinks the decision will go.

"Given how far we've come, we may proceed cautiously in future meetings, assessing incoming data and changing perspectives and risks," he said.

However, he gave no indication that he was thinking about lowering interest rates.

"At future meetings, we will assess our progress based on overall data and new perspectives and risks," Powell said. "Based on this assessment, we will continue to exercise caution in deciding whether to tighten monetary policy or instead hold interest rates steady and wait for more data."

The president added that economic growth may have to slow before the Fed can change course.

According to the Atlanta Fed, gross domestic product has been growing continuously since the start of interest rate hikes, and in the third quarter of 2023, the growth rate will be 5.9%. Employment also remains high, with the unemployment rate hovering around the lowest levels last seen in the late 1960s.

“Mostly thinking they're close to done, they think they probably have more work to do ... that's the story they've been telling for a while. And that was the heart of what he said today," said Bill English, a former Fed official who is now a finance professor at Yale.

"I don't think it's about sending a signal. I think they really think they're here." "The economy has slowed down a little bit, but not enough to be sure that inflation will come down.”

Indeed, Powell noted the risk of strong economic growth amid widespread recession expectations and noted that this could lead to the Fed holding interest rates longer.

"It was a balanced but not trendsetting speech, even though the Fed kept the 'mission accomplished' sign under wraps," said Jack McIntyre, portfolio manager at Brandywine Global. "That leaves the Fed with the necessary option to tighten further or keep interest rates unchanged."

While last year's speech was extremely brief, this time Powell provided a bit more detail about the factors that influence policymaking.

Specifically, he broke down inflation into three key indicators and concluded that the Fed's main focus is on core inflation, which excludes volatile food and energy prices. He also reiterated that the Fed is more closely monitoring the personal consumer price index, which is measured by the Commerce Department, rather than the Labor Department's consumer price index.

The three "general elements" he talked about include goods, residential services such as rental costs, and non-residential services. He noted progress in all three areas, but concluded that the non-residential sector was the most difficult to quantify because it was the least sensitive to changes in interest rates. This category includes, among others: health, food and transport.

"Twelve months ago, inflation in this sector fell. "However, measured inflation over the past three and six months has fallen, which is encouraging," Powell said. "Given the size of the sector, further progress will be needed to restore price stability."

In addition to broader policy perspectives, Powell honed in on certain areas that are critical for both market and policy reasons.

Some lawmakers, particularly Democrats, have suggested the Fed raise its inflation target from 2%, which would give it more policy flexibility and could discourage further rate hikes. However, Powell dismissed the idea as he has done in the past.

"Two percent is and will remain our inflation target," he said.

This part of the speech drew criticism from Harvard economist Jason Furman.

“Jay Powell made a good point about short-term monetary policy, still hoping for the best, planning for the worst. He has shown due caution regarding the progress of inflation and his asymmetric approach to monetary policy." - Furman, chairman of former President Barack Obama's Council of Economic Advisers, posted on X, the social network formerly known as Twitter. It's a shame that he didn't rule out a change in target.

Elsewhere, Powell largely shut himself out of the discussion of what is the long-term, or natural, interest rate that is neither restrictive nor stimulative — the "r-star" rate he talked about in Jackson Hole in 2018.

"We see the current political stance as restrictive, putting pressure on economic activity, employment and inflation," he said. "But we cannot identify the neutral interest rate with certainty, so there is always uncertainty about the exact level of monetary policy tightening."

Powell also noted that previous tightening is likely not yet in the system, adding further caution to the future of policy.