Federal Reserve Chair Jerome Powell said the U.S. central bank is prepared to raise interest rates further if needed and intends to keep borrowing costs high until inflation is on a convincing path toward the Fed’s 2% target.
“Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell said in the text of a speech Friday at the U.S. central bank’s annual conference in Jackson Hole, Wyoming. “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 welcomed the slower price gains the U.S. economy has achieved thanks to tighter monetary policy and further loosening of supply constraints after the pandemic. However, he cautioned that the process “still has a long way to go, even with the more favorable recent readings.”
At the same time, Powell suggested the Fed could hold rates steady at its next meeting in September, as investors expect.
“Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” he said.
The overall message is that the Fed has stepped into a more gradual approach to policymaking, and is focused on balancing the risk that inflation could remain elevated with the possibility that too much tightening could trigger an economic downturn.
A year ago in the same forum, Powell said the Fed was taking “forceful and rapid steps” to quell inflation. While the central bank has covered a lot of ground since then, he said Friday, the message picked up where he left it in 2022: The job’s not done.
“Overall, the message remains that the Fed has delivered a lot,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “But inflation — even as it has abated — remains too high. And now policymakers are aware of the risks related to resilience in economic activity and are prepared to do more, if needed.
“Another rate hike, perhaps even two, cannot be ruled out although the decision ultimately will depend on the totality of incoming data,” Farooqi said.
After fluctuating in the initial minutes of Powell’s speech, markets settled into a view that the remarks implied higher short-term rates. Two-year Treasury yields rose to a session high before paring gains, while the S&P 500 stock index was below its session high.
Futures traders were pricing in a roughly two-thirds chance that the central bank will raise its key interest rate by a quarter percentage point in November after a likely pause at its meeting next month.
Policymakers are in a new phase of their campaign to bring inflation back to the Fed’s 2% target. After aggressive rate increases in 2022, Powell and his colleagues have slowed the pace this year, and signaled they may be close to wrapping up. The question now is how long they hold at a restrictive level and how the economy performs under those conditions.
Officials raised their benchmark rate last month to a range of 5.25% to 5.5%, a 22-year high, after skipping a hike at their June meeting. Their most recent projections had one more rate increase penciled in this year.
The increases have raised real interest rates, or interest minus inflation, to positive territory, Powell said, a minimum standard to get inflation lower. He also noted that assessing the so-called neutral rate, which balances supply and demand, in real time is always uncertain and thus the true level of policy restraint is uncertain.
Powell noted the economy may not be cooling as fast as expected, saying recent readings on economic output and consumer spending have been strong. The economy grew at a 2.4% annualized pace in the second quarter, a surprisingly robust reading that prompted many economists to boost forecasts for the third quarter and reconsider odds of a recession.
“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. He noted improvements in labor supply while demand for workers has moderated.
Even so, he warned that if those conditions reversed it “could also call for a monetary policy response.”
Powell also pushed back on speculation that the central bank could raise its inflation target, an idea that has been hotly debated mostly by academics in recent months.
“Two percent is and will remain our inflation target,” he said.
Inflation has cooled significantly since reaching a four-decade high last year, though it remains above the Fed’s 2% goal. The central bank’s preferred gauge, the personal consumption expenditures price index, rose 3% in June from a year earlier, the slowest pace since early 2021. Underlying price pressures are stronger, with PCE minus food and energy increasing at a 4.1% pace.
Powell said inflation data showing core price pressures easing in June and July were welcome but “only the beginning” of what it will take to build confidence that inflation is moving down “sustainably.”
The Fed chief said officials need to see sustained progress on core goods inflation, which has come down but remains above its prepandemic level. He also said housing services inflation should continue to decelerate further, but said officials will be watching market rent data closely for signs of upside or downside risks to inflation.
In addition, Powell said “some further progress” in non-housing services prices — a category that includes areas such as transportation and food services — will be essential to assure overall price stability.
Catarina Saraiva and Craig Torres