– Welcomes Disinflation but Repeats Need ‘Confidence’ Policy ‘Sufficiently Restrictive’
– ‘Premature’ To ‘Speculate on When Policy Might Ease’
– Reiterates FOMC To ‘Proceed Carefully” But Will Raise Rates Further If Needed
By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell welcomed continued progress on inflation reduction Friday, but declined to reinforce recent Wall Street speculation that the Fed’s next move will be to cut short-term interest rates before much longer.
On the contrary, Powell declared it “premature” to conclude monetary policy is “sufficiently restrictive” to reduce inflation to the Fed’s 2% target, as he spoke at Atlanta’s Spelman College. Even more bluntly, he called it “premature” to “speculate on when policy might ease.”
Powell, speaking less than two weeks before the Fed’s rate-setting Federal Open Market Committee holds its final meeting of 2023, went even further to reiterate that the Fed will “tighten policy further” if needed.
On Nov. 1, the FOMC left the federal funds rate in a target range of 5.25% to 5.50% for the second straight meeting, but retained a tightening bias by citing conditions for “determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time.”
At that time, Powell called monetary policy “restrictive,” but told reporters the FOMC must become “confident” policy is “sufficiently restrictive” to lower inflation to 2% “over time.” He reiterated that stance at the International Monetary Fund eight days later and warned, “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”
Powell did not significantly diverge from that viewpoint in his latest comments.
“Having come so far so quickly, the FOMC is moving forward carefully, as the risks of under- and over-tightening are becoming more balanced,” he said, adding that “uncertainty about the outlook for the economy is unusually elevated.”
However, Powell made clear the FOMC is not near a monetary turning point of shifting toward less monetary restraint.
“The FOMC is strongly committed to bringing inflation down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective,” he said in prepared remarks. “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.”
“We are prepared to tighten policy further if it becomes appropriate to do so,” he added.
Powell reiterated that the FOMC will be “making decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks.”
Responding to questions, Powell reemphasized the Fed’s “careful” approach, but again left the door open to further tightening.
Now that policy is “restrictive” and “holding the economy back,” he said, “we think the right thing to be doing now is to be moving carefully, thinking carefully….”
“The data will tell us whether we’ve done enough, whether we need to do more…,” he continued. The FOMC will move “carefully (and) let the data reveal the appropriate path.”
“We don’t need to be in a rush now,” he went on. “Having moved forcefully….we now have the ability to move carefully.”
The Fed chief’s remarks come on the heels of favorable inflation news that, together with comments from some Fed officials, has fueled speculation that the FOMC will be cutting rates in the first half of next year.
Earlier this week, Fed Governor Christopher Waller raised eyebrows when he said that if inflation continues to decline “for several more months … three months, four months, five months … we could start lowering the policy rate just because inflation is lower.”
Waller, ordinarily considered “hawkish,” had said in October that “something’s got to give.” As he put it, “for inflation to continue falling to our 2% target, the economy needed to slow from its torrid (5.2%) third-quarter pace. If it did not cool off, then it was likely that progress on inflation would stop or even reverse. So, what remained to be seen was whether the economy would cool or inflation would heat up.”
By Tuesday, Waller had concluded “something appears to be giving, and it’s the pace of the economy. Data for October indicated an easing in economic activity, and forecasts for the fourth quarter show the kind of moderation that is more in keeping with progress on lowering inflation. In addition, after watching core PCE inflation increase in September from its summer lows, the latest data showed inflation moving in the right direction in October, albeit gradually.”
So, Waller said he was “increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%.” He added a caveat: “there is still significant uncertainty about the pace of future activity, and so I cannot say for sure whether the FOMC has done enough to achieve price stability.”
His comments caused some on Wall Street to believe the FOMC could cut rates as soon as its March meeting, giving share prices an additional boost while pushing bond yields lower. Ahead of Powell’s address, the Dow Jones Industrial Average rose above 36,000, following a 520 point gain on Thursday, as the 10-year Treasury note yield sank to 4.30% — 70 basis points below an Oct. 22 peak.
Since then, officials have been more circumspect in musing about rate cuts. New York Federal Reserve Bank President and FOMC Vice Chairman John Williams seemed to push back somewhat Thursday.
Like Waller, Williams said he “expect(s) inflation to continue to move down to our 2% longer-run goal,” but he added, “the future remains highly uncertain, and our decisions will continue to be data dependent. The risks are two-sided, with the possibility of inflation remaining stubbornly persistent weighed against the risk of a weaker economy and employment.”
Williams said “we are at, or near, the peak level of the target range of the federal funds rate” and called monetary policy “quite restrictive,” but said “I expect it will be appropriate to maintain a restrictive stance for quite some time to fully restore balance and to bring inflation back to our 2 percent longer-run goal on a sustained basis.”
And he added, “If price pressures and imbalances persist more than I expect, additional policy firming may be needed…..(W)e have seen meaningful progress on bringing inflation down and restoring balance to the economy. But our work is not nearly done.”
Williams was speaking after the Commerce Department reported its price index for personal consumtpion expenditures (PCE) slowed further in October to a 3% year-over-year pace (3.5% core).
Powell seemed to continue the Fed leadership’s pushback against overly exuberant market sentiment.
Prefacing his monetary policy commentary, Powell said “labor market conditions remain very strong, and the economy is returning to a better balance between the demand for and supply of workers. The pace at which the economy is creating new jobs remains strong, and has been slowing toward a more sustainable level.”
“That gradual slowing has come in part due to the efforts of the Fed to slow the growth of the economy to help reduce inflation,” he continued.
Powell added that “wage growth remains high but has been gradually moving toward levels that would be more consistent with 2% percent price inflation over time, and real wages are growing again as inflation declines.”
As for inflation, Powell cited progress in bringing it down from high levels, but made clear he is still not satisfied.
“Inflation has declined to 3 percent over the 12 months ending in October, but after factoring out energy and food prices, which tend to be volatile, what we call “core” inflation is still 3.5 percent, well above our 2 percent objective,” he said. “Over the six months ending in October, core inflation ran at an annual rate of 2.5 percent, and while the lower inflation readings of the past few months are welcome, that progress must continue if we are to reach our 2 percent objective.”
Powell said “the normalization of supply and demand conditions has played a critical role in the disinflation so far, as has the substantial tightening of monetary policy and overall financial conditions over the past two years.”
“The strong actions we have taken have moved our policy rate well into restrictive territory, meaning that tight monetary policy is putting downward pressure on economic activity and inflation,” he went on, but “the full effects of our tightening have likely not yet been felt….”
Powell remained hopeful of a “soft landing,” although he did not use that terminology.
In past business cycles, he noted, reducing inflation has involved heavy job losses, but in the current climate, he said, “we haven’t seen that here….”
Powell said he has long thought “there is a path to getting inflation down to 2% without that kind of large job loss, and I still believe that…we’re on that path, but some softening in the economy has happened…growth has slowed to a more sustainable level…We have to restore price stability. That’s the bedrock of the economy.”
After an estimated 5.2% third quarter real GDP growth pace, Powell said he is watching to “see how much slowing there is” in the fourth quarter.