– Funds Rate Now ‘Restrictive’ But Unsure If It’s ‘Sufficiently Restrictive’
– FOMC Can Afford to Proceed ‘Carefully’
– Will Watch for Evidence of Progress on Inflation, Labor Market Tightness
By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell expressed a mild, but clear bias toward additional monetary tightening in an anxiously awaited policy speech Friday.
How much higher, if any, the Fed may need to raise short-term interest rates will depend upon how much more progress it makes in reducing inflation and upon evidence that sought-after “rebalancing” of supply and demand in labor markets is occurring, Powell said in a keynote address kicking off the Kansas City Federal Reserve Bank’s annual Jackson Hole symposium.
Although the eleven hikes in the federal funds rate which the Fed’s policymaking Federal Open Market Committee has implemented have brought the policy rate to a “restrictive” stance, Powell left doubt whether it is “sufficiently restrictive” to bring inflation down the 2% target.
So, the FOMC is prepared to do more, albeit “carefully,” he told an audience of Fed officials and foreign central bankers meeting in the shadows of the Grand Tetons.
Powell was blunt: “We have tightened policy significantly over the past year. Although inflation has moved down from its peak—a welcome development—it remains too high. 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.”
Powell’s comments come four weeks after the FOMC resumed raising the federal funds rate following a June pause. The FOMC raised that key money market rate by 25 basis points to a target range of 5.25% to 5.5% — making a cumulative 525 basis points of rate hikes since the Fed left the zero lower bound in March 2022.
The FOMC left the door open to further rate hikes in its July 26 policy statement, reiterating that “additional policy firming … may be appropriate,” depending on how it assesses various factors. Powell suggested the Sept. 19-20 FOMC meeting will be a “live” one, saying he and his colleagues had not moved to an “every other meeting” schedule and saying he wouldn’t take rate hikes at “consecutive meetings” “off the table.”
In his July 26 press conference Powell said that if the inflation data are not satisfactory by Sept. 20, the FOMC would “go ahead” and raise rates again, but he left open the possibility that the committee could decide to “hold steady.”
If anything, Powell sounded more determined to use monetary restraint to battle inflation in his Jackson Hole prepared remarks, although he refrained from signaling a Sept. 20 move. He laid out a deliberate strategy.
“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.
At the same time, Powell declared that he and his fellow policymakers, many of them in attendance, “are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to that (2%) level over time.”
Looking beyond the nominal funds rate, Powell noted that “real interest rates are now positive and well above mainstream estimates of the neutral policy rate.” Therefore, “we see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation.”
But he added, “we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.”
Further complicating the FOMC’s task of assessing the adequacy of past rate hikes is “uncertainty about the duration of the lags with which monetary tightening affects economic activity and especially inflation,” Powell went on.
Such uncertainties make it more difficult for the Fed to achieve “our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little,” he said.
“Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment,” he continued. “Doing too much could also do unnecessary harm to the economy.”
Likening the current conduct of monetary policy to “navigating by the stars under cloudy skies,” Powell said the FOMC will operate under certain “risk-management considerations.”
“At upcoming meetings, we will assess our progress based on the totality of the data and the evolving outlook and risks,” he elaborated. “Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.”
But Powell again stressed the Fed’s commitment to bring inflation down to 2% and asserted, “We will keep at it until the job is done.”
He suggested it will take a good while longer to do that “job.”
The Fed has been tightening monetary policy to “slow the growth of aggregate demand, allowing supply time to catch up,” he said, but “while these two forces are now working together to bring down inflation, the process still has a long way to go, even with the more favorable recent readings.”
The Fed chief prefaced those policy remarks with a largely familiar analysis of the economic outlook. But he expressed more concern about stronger than expected economic activity than he had in the past.
Looking at inflation data, he noted that the Fed’s preferred price index for personal consumption expenditures (PCE) has declined from a June 2022 peak of 7% to 3.3% from a year earlier this June, and he called that “very good news.” But he said the core PCE, which rose 4.1%, “is still elevated, and there is substantial further ground to cover to get back to price stability.”
As he has in the past, Powell noted that goods prices and interest-sensitive housing prices have weakened, but observed that prices for “non-housing services,” which account for over half of the core PCE index, have merely “moved sideways since liftoff.”
“Given the size of this sector, some further progress here will be essential to restoring price stability,” he said, adding, “Over time, restrictive monetary policy will help bring aggregate supply and demand back into better balance, reducing inflationary pressures in this key sector.”
Powell has often said that lowering inflation will require a period of below trend growth and softening of labor markets, and he repeated that strategy in Jackson Hole, but he suggested those aims have not yet been fulfilled, given recent strength in consumption and continued tightness in the labor market.
He said tighter financial conditions should be slowing the economy and softening labor market conditions, but added “we are attentive to signs that the economy may not be cooling as expected.”
“So far this year, GDP growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust,” he noted. “In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up.”
Powell warned that “additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
In the labor market, he said “rebalancing…has continued over the past year but remains incomplete.”
Although wage growth has slowed, “real wage growth has been increasing as inflation has fallen,” he noted, saying that “wage growth must ultimately slow to a rate that is consistent with 2% inflation.
Lack of progress in this area could be another trigger for higher rates, Powell made clear. “Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response.”