– Will ‘Proceed Carefully,” But Ready To Raise Rates Further If Needed
By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell continued Thursday to leave open the option for further monetary tightening, despite rampant Wall Street speculation that the Fed’s next move might be to ease credit.
Powell said the Fed is not yet “confident” that monetary policy is “sufficiently restrictive” to reduce inflation to 2%.
“If it becomes appropriate to tighten policy further, we will not hesitate to do so,” Powell told a research conference at the International Monetary Fund, adding, however, that the Fed “will continue to move carefully.”
Powell’s comments come eight days after the Fed’s rate-setting Federal Open Market Committee voted to leave the federal funds rate in a target range of 5.25% to 5.50% for the second straight meeting. But it left the door open to further rate hikes by again referencing conditions for “determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time.”
Immediately after the FOMC extended its rate hike pause, Powell called monetary policy “restrictive,” but repeatedly told reporters he and his fellow policymakers need to become “confident” policy is “sufficiently restrictive” to lower inflation to 2% “over time.”
While welcoming inflation’s recent downtrend, he said it “remains well above our 2% target,” and warned “additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
Powell said last week the FOMC is not considering either rate cuts or easing its “quantitative tightening.”
Notwithstanding those assertions, which he reiterated Thursday. stocks rallied steeply for seven straight trading sessions, and bond yields plunged, on the assumption that the Fed was finished raising rates after 525 basis points of cumulative rate hikes since March 2022.
Since the FOMC meeting, divergent comments from other Fed officials seemed to cast doubt on that market sentiment. Powell’s latest remarks reinforce the message that the Fed is not necessarily finished raising rates.
“Inflation has come down over the past year but remains well above our 2% target,” Powell told the IMF audience.
Powell said he and his colleagues “are gratified by this progress but expect that the process of getting inflation sustainably down to 2% has a long way to go.”
“The labor market remains tight, although improvements in labor supply and a gradual easing in demand continue to move it into better balance,” Powell said.
The Fed chief said he expects gross domestic product growth to “moderate in coming quarters,” after growing an estimated 4.9% at an annual rate in the third quarter, but he said, “that remains to be seen.”
So he said “we are attentive to the risk that stronger growth could undermine further progress in restoring balance to the labor market and in bringing inflation down, which could warrant a response from monetary policy.”
Powell again declared that the FOMC “is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time,” but he added, “we are not confident that we have achieved such a stance.”
“We know that ongoing progress toward our 2% goal is not assured,” he continued. “Inflation has given us a few head fakes.”
“If it becomes appropriate to tighten policy further, we will not hesitate to do so,” Powell added.
“We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening,” he went on. “We are 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, determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time.”
“We will keep at it until the job is done,” Powell added.
Powell’s comments come on the heels of a series of remarks by other Fed officials, showing a split in policy proclivities.
On the “dovish” side, voting Chicago Federal Reserve Bank Preisdent Austan Goolsbee
mused about rate cuts: “As long as we’re making progress (against inflation), … the moment of arguing how high should the rate go is going to fade to how long should we keep rates at this level as inflation is coming down.”
Philadelphia Fed President Patrick Harker, another voter, said “the time had come to (hold rates steady), possibly for a while.”
Harker said, “a decrease in the policy rate is not something that is likely to happen in the short term,” but favored leaving rates “higher for longer” at current levels. “Interest rates remain in restrictive territory and, so long as they are, they will continue to put a damper on inflation.”
Others have sounded more “hawkish.” Governor Michelle Bowman said she “continue(s) to expect that we will need to increase the federal funds rate further to bring inflation down to our 2% target in a timely way…. I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation to 2 percent in a timely way….”
Voting Minneapolis Fed President Neel Kashkari said “inflation has come down, but just as the chairman said it’s not all the way down to 2%…So we’re making progress, …. but we’ haven’t completely solved the inflation problem. We still have more work ahead of us to get it done.”
And Dallas Fed President Lorie Logan, also a voter, questioned whether the funds rate is high enough: “We’ve seen some welcome progress with respect to inflation, but inflation still remains too high, For me, the core question is whether financial conditions that we’re seeing today are sufficiently restrictive to return inflation to 2% in both a timely and sustainable way.”
Earlier Thursday, Bowman reiterated her tightening bias, while Richmond Fed President Barkin occupied the middle ground, “We’ve come a long way quickly, but the job isn’t done. Inflation remains too high, and the Fed has to walk a fine line.”
Pointing to robust consumer spending, he said, “Demand this strong isn’t the fix for inflation and would likely require more from us…..I’m not yet convinced that inflation is on a smooth glide path down to 2%….. I fear more will have to happen on the demand side to convince price setters the inflation era is over.”
Barkin, a 2024 voter, added, “Whether a slowdown that settles inflation requires more from us remains to be seen… With rates restrictive and financial conditions tightened, we have time to reconcile competing narratives on demand and to test different views on the trajectory of inflation.”
St. Louis Fed’s Interim President Kathleen O’Neill Paese also supported conditional tightening. “With policy currently exerting modest downward pressure on inflation, and given the balance of risks, we can afford to await further data before concluding that additional policy tightening is appropriate. However, if progress toward achieving 2 percent inflation stalls, I believe that the Committee should act promptly to ensure that high inflation does not become entrenched….”
In response to questions, Powell maintained that the funds rate is already at restrictive levels, but said the FOMC is still trying to assess how much higher it might need to go.
Pointing to forward projections of inflation of about 3% and comparing that to the 5.25-5.50% funds rate, he said the policy rate is “above the estimate of where natural rate might be….The funds rate is in the range of restrictive policy, probably significantly restrictive.”
Powell added that calculating the exact level of the “neutral” rate is “less interesting than the job we have to do,” which he said involves watching how actual economic data are responding to Fed rate hikes.
Asked about why bond yields have moved higher and their impact on monetary policy, Powell began by saying that Fed rate moves are intended to “affect broader financial conditions, (which) then affect the real economy.”
But he said “we don’t target any one financial condition, but broader financial conditions,” and he said “it’s hard to draw a line from one thing like bond yields to what the Fed should do.”
In determining the importance of higher yields, he said the Fed must look for “persistent changes” and ask “why are longer run rates going up?”
Powell said the reason for higher yields “really matters” and is “something we’re looking at,” but he said “we don’t have to decide” now.”
“We’re moving carefully” after “we moved very fast,” he said, so “it’s not something we’re trying to make a decision about right now.”
Powell said there are four or five “candidates” for why long-term rates have climbed, but said, “we really don’t know.”
Whatever the cause, the important thing, he said, is that “people are experiencing these higher rates affecting their mortgages, their floating rate debt…”
Asked if he’s concerned about “overtightening,” Powell said, “we don’t want to go too far,” but added, “We’re going to keep at this until we succeed”
After leaving the zero lower bound in March 2022, Powell said “it became obvious we needed to tighten as quickly as we could…; the main thing was speed.”
Then, “the question became how high to go,” he continued, “and we’re still on that question.”
Powell said “the next question will be how long” to keep rates high. “We’re looking at incoming data, the implications for the outlook, what we are learning about the outlook, the balance of risks, then make a judgment whether we need to do more.”
Currently, he emphasized, “speed is no longer the main thing; the thing is to get to the right level.”
In other comments, Powell stressed the importance of central bank independence and warned against “the temptation” for the Fed to become immersed in non-monetary policy matters.