– Powell: Not Enough Progress on Core Inflation; ‘Have to Keep at It’
– Fed Will Do ‘Whatever It Takes’ To Reduce Inflation to 2%
– FOMC Participants Revise Funds Rate Projections Higher: FFR Seen At 5.6% End 2023
By Steven K. Beckner
(MaceNews) – Interrupting its long campaign of anti-inflationary monetary tightening measures, the Federal Reserve left interest rates unchanged Wednesday, but strongly signaled it may have to resume rate hikes if inflation fails to recede as much as hoped.
Observers have long anticipated, or hoped, for a “pause” in the Fed’s historic sequence of hikes in the key federal funds rate, ultimately leading to rate cuts. However, Chair Jerome Powell and his fellow policymakers went out of their way to warn a recently bullish Wall Street that its decision to stand pat does not necessarily signify an indefinite suspension of monetary tightening.
On the contrary, Powell told reporters “nearly all” Fed officials think the funds rate “will need to go higher.”
Powell emphasized that the Fed’s rate-setting Federal Open Market Committee had merely decided to “skip” raising the federal funds rate at this meeting and wait to see the lagged effects of past monetary tightening as well as an uncertain amount of bank credit tightening caused by a spring rash of bank failures.
Although Powell and other Fed officials have called the current funds rate level “restrictive” since the last 25 basis point rate hike on May 3, Powell and the FOMC left the distinct impression that they do not regard it as “sufficiently restrictive” to cool demand enough to ease wage-price pressures in tight labor markets.
Calling labor markets “very, very tight” and lamenting a lack of progress on reducing core inflation, Powell said “we’re going to have to keep at it” and said he and his colleagues are prepared to do “whatever it takes” to reduce inflation to 2%.
Attention now immediately turns toward the FOMC’s July 25-26 meeting, with some Fed watchers already predicting a mid-year rate hike. Powell said the Fed will make monetary decisions “meeting by meeting’ and said July will be “a live meeting.”
After 10 successive increases totaling 500 basis points, the FOMC unanimously left the federal funds rate in a target range of 5.0% to 5.25%. But the FOMC left the door open to a resumption of rate hikes in its policy statement. It also gave no indication it is getting closer to ending the shrinkage of the Fed’s securities portfolio or “quantitative tightening.”
By way of explanation for holding rates steady, it said, “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy.”
Then the statement reiterated that, “in determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Powell went further in his post-FOMC press conference after noting that the Fed has already raised the funds rate by five percentage points since it stopped holding it near zero last March.
“The full effects have yet to be felt,” he said. “In light of how far we’ve come in tightening policy, the uncertain lags with which monetary policy affects the economy, and potential headwinds from credit tightening, today we decided to leave our policy interest rate unchanged and continue to reduce our securities.”
However, he added, “nearly all participants think further rate changes will be necessary.”
In another indication that the FOMC may not be done raising rates, participants significantly revised up their funds rate projections – the so-called “dot plot” for this year and beyond.
In the last Summary of Economic Projections published in March. they projected that the funds rate would reach 5.1% (5.0% to 5.25%) by the end of 2023 – a level that was reached early with the last 25 basis point move on May 3 . Now, they see the funds rate climbing to a median 5.6% (5.5 to 5.75%) by the end of this year, implying no rate cuts until next year.
Projections range from 5.1% to 6.1%. Both numbers are up from March.
By the end of 2024, FOMC participants project the funds rate will be down to 4.6%, but that’s up from 4.3% in the March SEP. By the end of 2025, they see the funds rate at 3.4%, up from 3.1% in March.
The increased funds rate projections for 2023 are accompanied by upward revisions to the officials’ inflation forecasts and a further delay in the date at which inflation is expected to return to 2%. The PCE price index is now seen at 3.2% at the end of this year, which is down a bit from 3.3% in March. The PCE is expected to slow to 2.5% next year, the same as March.
However, the SEP presents a more discouraging picture for the much more closely watched core PCE, which has been slower to retreat than the overall PCE. The core index is now forecast to end this year at 3.9% — up from 3.6% in March. Next year it is expected to slow to 2.6%, the same as in March.
Not until the end of 2025 is PCE inflation expected to near 2%, and even then it is forecast at 2.2%, a tenth higher than forecast in March.
Simultaneously, Fed officials revised up their forecasts for GDP growth and revised down their forecasts for unemployment, the implication being that rates are not yet restrictive enough to cool demand for labor or for products and services.
The Fed decision to leave monetary policy unchanged in what Powell and others have called a “restrictive” stance came a day after the Labor Department’s May consumer price index showed a further moderation of inflation. The CPI rose 0.1% or 4.0% from a year earlier – the slowest pace in over two years. However, the core CPI rose 0.4% last month and 5.3.% from a year ago.
Powell repeatedly emphasized the Fed’s commitment to reducing inflation to 2%, even if that requires a period of subpar economic growth and higher unemployment. So far, he suggested, progress against inflation has been disappointing.
“Inflation has moderated somewhat,” he conceded, but “inflation pressures continue to run high .…”
Powell said there are “only the earliest signs” of disinflation in core service prices excluding housing. “We’re just not seeing a lot of progress.” He also said wages, despite some moderation, are still growing at a pace faster than is “consistent” with 2% inflation.
So, he added, “we have a long ways to go.”
“(W)hat we’d like to see is credible evidence that inflation is topping out and then getting to come down,” Powell said.
Given that gloomy assessment of inflation, Powell left little doubt that, based on current expectations, the FOMC will be resuming rate hikes at some point, although he avoided pointing to the July meeting as a time for that to happen.
“Inflation has not really moved down,’ he said. “It has not reacted much to our existing rate hikes. We’re going to have to keep at it.”
But that doesn’t mean the Fed has to raise rates as aggressively as it did in the past, when it raised the funds rate by 75 basis points at four straight meetings, Powell explained.
“As we get closer to the (funds rate) destination, and according to the SEP we’re not so far away from it, it’s reasonable, it’s common sense to go a little slower, just as it was reasonable to go from 75 basis points to 50 to 25 at every meeting,” he said. “And so the committee thought overall that it was appropriate to moderate the pace, if only slightly.”
“And there are benefits to that,” he continued. “So that gives us more information to make decisions…. It allows the economy a little more time to adapt as we make our decisions going forward …..”
But Powell left no doubt as to the direction of rates, observing that “early all participants think further rate changes will be necessary” and that no FOMC participant projected a rate cut this year. Even the lower nominal rates projected for next year are premised on the need to prevent real rates from rising as inflation hopefully falls, he said.
“I think we’ve moved much closer to our destination, which is that ‘sufficiently restrictive’ rate. and I think that means, almost by definition, that the risks of, sort of, overdoing it or under doing it are getting closer to being in balance,” he said.
However, Powell added, “I still think and my colleagues agree that the risks to inflation are to the upside still. So, we don’t think we’re there with inflation yet, because …. if you look at the full range of inflation data, particularly the core data, you just aren’t seeing a lot of progress over the last year.”
“Headline, inflation has come down materially, but we look at core as a better indicator of where inflation overall is going,” he went on. “So, I think what we’d like to see is credible evidence that inflation is topping out and then getting to come down.”
Explaining why “we’re comfortable pausing,” Powell said “much of the tightening took place last summer, and I think it’s reasonable to think that some of that may come into effect. So, we’re stretching out into a more moderate pace as appropriate to allow you to make that judgment of sufficiency with more data over time.”
Although Fed officials have made divergent comments in recent weeks, Powell suggested the FOMC is monolithic in its commitment to defeating inflation.
“The committee is completely unified in the need to get inflation down to 2% and will do whatever it takes to get it down to 2% over time,” Powell declared. “That is our plan. And… we understand that allowing inflation to get entrenched in the U.S. economy is the thing that we cannot allow to happen for the benefit of today’s workers and families and businesses, but also for the future.”