- Don’t Want To Overtighten, But Don’t Want To Do Too Little To Fight Inflation
- Fed To Raise Rates To ‘Sufficiently Restrictive’ Level and Keep Them Thereafter
- Fed Doesn’t Expect To Cut Rates Anytime Soon
- Funds Rate Likely Needs To Go Higher Than Projected in September SEP
By Steven K. Beckner
(MaceNews) – Federal Reserve Chairman Jerome Powell said Wednesday the Fed will be slowing the pace of interest rate hikes as soon as the mid-December meeting of the Fed’s policymaking Federal Open Market Committee, but made clear a slowing does not mean that the FOMC will soon stop raising rates, much less reduce them.
Powell said he and his fellow monetary policymakers do not want to over tighten credit and spark a recession, but neither do they want to raise rates too little and not do enough to reduce
inflation to the Fed’s 2% target.
Slowing the pace of federal funds rate hikes but continuing to raise them to an “appropriate” level and keeping them there is the Fed’s preferred “risk management” approach, he said at the
Brookings Institution in Washington.
Powell did not say what the appropriate rate level will ultimately be, citing uncertainty, but said the funds rate will need to be above neutral in real terms. And he said the funds rate will likely
need to go higher than Fed officials projected in September.
Powell’s eagerly awaited speech comes two weeks before the FOMC holds its last meeting of the year amid speculation that the FOMC will slow the pace of rate hikes after four consecutive
75 basis point increases.
On Nov. 2, the FOMC raised the funds rate to a target range of 3.75% to 4.0%, culminating 375 basis points of monetary tightening since the FOMC stopped holding it near zero. In announcing
its sixth straight rate hike, the FOMC reiterated that “ongoing increases” will be needed “in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over
time.”
The FOMC also stated, “In determining the pace of future increases in the target range, 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.”
In his Nov. 2 post-FOMC press conference, Powell indicated the pace of rate hikes would slow at either the Dec. 13-14 or Jan. 31-Feb. 1 meeting, seemingly suggesting that the next rate hike
could be a 50 basis point move that would take the target range up to 4.25% to 4.5%s. However, Powell said then that the Fed has “a ways to go” before it reaches a “sufficiently
restrictive” policy stance and said it’s “very premature to think about pausing” rate hikes. What’s more, he said “incoming data since our last meeting suggests that the ultimate level of interest
rates will be higher than previously expected” – a reference to the FOMC’s September Summary of Economic Projections, in which participants projected the median funds rate
climbing to 4.4% at the end of 2022 and to 4.6% at the end of 2023.
Fed officials will be releasing a new quarterly SEP with a revised set of funds rate and other projections on Dec. 14. Fed watchers will be parsing those new rate “dots,” as well as Powell’s
post-FOMC remarks for clues on the path of monetary policy next year.
In his Brookings talk, Powell did not diverge greatly from what he said on Nov. 2. “For starters, we need to raise interest rates to a level that is sufficiently restrictive to return
inflation to 2%,” he said in prepared remarks.
“There is considerable uncertainty about what rate will be sufficient, although there is no doubt that we have made substantial progress, raising our target range for the federal funds rate by
3.75 percentage points since March,” he continued. “As our last post meeting statement indicates, we anticipate that ongoing increases will be appropriate.”
Reiterating a point he made in his Nov. 2 press conference, Powell said “it seems to me likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the
September meeting and Summary of Economic Projections. … . We have more ground to cover.”
Because monetary policy affects the economy and inflation with “uncertain lags,” and because “the full effects of our rapid tightening so far are yet to be felt,” Powell said “it makes sense to
moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down.”
“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell continued.
“Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length
of time it will be necessary to hold policy at a restrictive level,” he went on.”
But Powell added that “it is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy.
We will stay the course until the job is done.”
Powell was urged to elaborate in a question and answer session, but did not add a lot of clarity, continually citing the uncertainty facing the FOMC.
He did say that the FOMC “want real rates to be above what we estimate as the long-run neutral rate,” adding, “That isn’t where we are.”
Powell said the Fed can’t wait for actual evidence that inflation is coming down, because that would “risk over tightening.” By slowing the pace of rate hikes, the Fed can better manage the
risks of raising them too much, he said.
“I don’t want to over tighten because cutting rates is not something we want to do soon,” Powell said. “That’s why we’re slowing down … to find what that appropriate level is.”
He said the FOMC is “going to have to be humble and skeptical for some time” as it judges how high the funds rate needs to go and for how long.
To determine what is “sufficiently restrictive,” Powell said the Fed will be monitoring financial conditions and their impact on the economy and assessing whether financial conditions are
having the desired effect of reducing demand relative to supply in product and labor markets. He said the Fed wants to see “significantly positive real rates” across the yield curve.
Powell said that if the Fed fails to do enough tightening to reduce inflation, inflation could become “entrenched” in wage and price-setting behavior, making the costs of curbing inflation
higher.
Under the Fed’s “risk management” approach, he said the Fed will “go slower and feel our way,” then “hold at a higher rate longer.”
Though he cited progress against inflation, Powell made clear he is not nearly satisfied. He noted that core goods prices have decelerated, but lamented that core service prices have not.
He also expressed concern about wage pressures.
“In the labor market, demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2%
inflation over time,” he said. “Thus, another condition we are looking for is the restoration of balance between supply and demand in the labor market.”
“Despite some promising developments, we have a long way to go in restoring price stability,” he said.
Restoring balance between supply nd demand to reduce inflation “is likely to require a sustained period of below-trend growth,” he said.
Nevertheless, Powell said he still sees a chance of a “soft landing.” Because of the large number of job openings relative to the number of willing workers, he said it’s possible the
economy could slow and soften the labor market without causing the steep increases in unemployment seen in past cycles, he maintained.
Earlier Wednesday, Fed Governor Lisa Cook also suggested the Fed has much more to do to reduce inflation before it can consider halting rate hikes.
”We have begun to see some improvement in the inflation data,” she told the Detroit Economic Club. “Nonetheless, I would be cautious about reading too much into one month of
relatively favorable data.”
“Core goods inflation has finally begun to slow significantly,” Cook said. “Services, however, make up about two-thirds of consumer spending, and inflation in that sector has not yet
slowed … . Services prices more broadly have accelerated sharply this year and may prove to be a persistent factor keeping inflation elevated.”
Cook also said “wage growth remains above what would be consistent with 2% inflation, given prevailing trends in productivity growth.”
Echoing the Nov. 2 FOMC statement, she said the funds rate needs to become “sufficiently restrictive,” but added, “What policy rate is sufficiently restrictive we will only learn over time by
watching how the economy evolves.”
“Given the tightening already in the pipeline, I am mindful that monetary policy works with long lags,” Cook continued. “Thus, as we get closer to that uncertain destination, it would be prudent
to move in smaller steps. How far we go, and how long we keep rates restrictive, will depend on observed progress in bringing down inflation.”
“But rest assured, we will keep at it until the job is done,” she added. Meanwhile, the Fed’s beige book survey of economic conditions around the nation through Nov. 23 found that “economic activity was about flat or up slightly since the previous report, down from the modest average pace of growth in the prior Beige Book period.”
The beige book, prepared for review at the Dec. 13-14 FOMC meeting, found labor markets still “tight,” with “moderate” wage increases, but “a few Districts experienced at least some relaxation of wage pressures.” The survey found “a moderate or strong pace” of price increases in most Districts, but “the pace of price increases slowed on balance.”
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Contact this reporter: steve@macenews.com
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