– Ups Funds Rate 25 Bp to 5.25-5.5%; ‘Extent of Additional Policy Firming’ Referenced
– Powell: FOMC Could Hike Again in September or Keep ‘Steady’ Depending on Data
– Powell Rules Out 2023 Rate Cuts
– FOMC Repeats ‘Inflation Remains Elevated’
– FOMC Repeats Bank Credit Tightening to Weigh on Firms and Households
By Steven K. Beckner
(MaceNews) – The Federal Reserve resumed raising short-term interest rates as expected Wednesday but left in doubt how soon it might raise rates further and how high rates may ultimately need to go to curb inflation before turning lower.
Chair Jerome Powell strongly suggested rates will need to go higher but steered clear of signaling it will happen at the Fed’s next monetary policy meeting in September, although he said that is possible.
In his post-FOMC news conference, Powell didn’t explicitly say the Sept. 19-20 Federal Open Market Committee meeting will be “a live one,” as he did in advance of the July meeting, but he implied as much. He declined to say the FOMC is now on an “every other meeting” schedule and repeated that he wouldn’t take rate hikes at “consecutive meetings” “off the table.”
If the inflation data are not satisfactory by the next meeting, Powell said the FOMC would “go ahead” and raise rates again. He said the FOMC could either raise rates again or keep them steady, depending on the data.
Powell ruled out rate cuts this year
After leaving the federal funds rate unchanged at its mid-June meeting, the Fed’s rate-setting FOMC unanimously raised that key money market rate by 25 basis points. The rate hike, the FOMC’s eleventh since it lifted off from the zero lower bound in March 2022, took the policy rate to a target range of 5.25% to 5.5% (median 5.3%).
The FOMC left the door open to further rate hikes in a statement by reiterating that “additional policy firming … may be appropriate,” depending on how it assesses various factors.
The FOMC did not revise its economic forecasts and funds rate projections at this meeting, but at the June meeting a majority of participants projected two more rate hikes to a range of 5.5% to 5.75%. Since then, speculation has mounted that the FOMC will raise rates again Sept. 20, when a new quarterly Summary of Economic Projections and funds rate “dot plot” will be published. Another 25 basis point move would consummate the FOMC’s June median projection of 5.6%.
The FOMC policy statement itself did not change “forward guidance.” After saying it “will continue to assess additional information and its implications for monetary policy,” the Committee repeated that “in determining the extent of additional policy firming that may be appropriate to return inflation to 2% 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.”
Despite moderation of inflation, the statement again said inflation “remains elevated” and said, “the Committee remains highly attentive to inflation risks,” even though recent government price indices have shown a moderation of inflation. The FOMC also reiterated that “job gains have been robust in recent months, and the unemployment rate has remained low.”
Powell welcomed recent lower headline inflation readings but said “the process of getting inflation back down to 2% has a long way to go.” Hence, he suggested monetary policy needs to be made tighter. How much will depend heavily on the price and other data, which the FOMC will evaluate on “a meeting by meeting” basis.
The Fed chief would not satisfy reporters’ curiosity about whether the FOMC will raise rates again on Sept. 20, neither ruling it out nor in.
Noting there will be two more inflation reports and two more employment reports, among other data, between now and then, he said, “All of that information is going to inform our decision as we go into that meeting.”
“I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted,” he continued. “And I would also say it’s possible that we would choose to hold steady at that meeting. We’re going to be making careful assessments as I said meeting by meeting.”
After 525 basis points of cumulative rate hikes, Powell said monetary policy is “restrictive and putting downward pressure on economic activity and inflation.”
Elaborating, he said, “the real federal funds rate is now in a meaningfully positive territory” Subtracting the projected rate of inflation from the nominal funds rate, “you get a real rate above most estimates of the longer term neutral rate.”
“So, I would say monetary policy is restrictive — more so after today’s decision, meaning it is putting downward pressure on economic activity and inflation,” he went on.
Powell added, “We’ll keep monetary policy restrictive until we think it’s not appropriate to do so….”
That could be for a good while, he suggested, observing, “It will take time however for the full effects of our ongoing monetary restraint to be realized, especially on inflation.”
Powell said the Fed has “come a long way,” but “inflation has proved repeatedly stronger than we and other forecasters have expected….”
“We have to be ready to follow the data, and given how far we’ve come we can afford to be a little patient as well as resolute as we let this unfold,” he added.
Powell offered little hope to those wishing for a near-term peak and subsequent descent of rates.
“We’d be comfortable cutting rates when we’re comfortable cutting rates,” he said. “That won’t be this year I don’t think.”
Powell noted that “many” FOMC participants projected rate cuts for 2024, but said, “that’s just going to be a judgment that we have to make then a full year from now. It will be about how confident we are that inflation is in fact coming down to our 2% goal.”
But he also made clear the FOMC needn’t wait until inflation gets to 2% to ease monetary policy. “You’d stop raising long before you got to 2% inflation, and you’d start cutting before you got to 2% inflation too, because we don’t see ourselves getting at two percent inflation until all the way back to two until 2025 or so.”
As of now, though, Powell said “policy has not been restrictive enough for long enough to have its full desired effects. So we intend to keep policy restrictive until we’re confident that inflation is coming down sustainably to our two percent target.”
“And we’re prepared to further tighten if that is appropriate,” he continued. “We think the process, you know, still probably has a long way to go.”
In September, Powell said he and his colleagues are “going to be looking at the incoming data to inform our decision at the next meeting about is the incoming data telling us we need to do more. If it does tell us more, if that’s our view we will do more.”
Fed officials have almost uniformly said a slower pace of tightening is now appropriate, but Powell said “a more gradual pace doesn’t go immediately to every other meeting. It could be two out of three meetings….”
“I wouldn’t want to go automatically to every other meeting because I just don’t think that’s — I think it’s not an environment where we want to provide a lot of forward guidance. There’s a lot of uncertainty out there. We just want to keep moving at what we think is the right pace.”
“I do think it makes all the sense in the world to slow down as we now make these finally judged decisions…,” he went on. “I think it’s possible… that we would move at consecutive meetings. We’re not taking that off the table. Or we might not. It really depends on what the data tells us.”
At previous meetings, the FOMC put great emphasis on the adverse impact early March bank failures were expected to have on bank credit availability, and Powell had mused that anticipated bank credit tightening might well “substitute” for at least some monetary tightening.
Since the last meeting, officials have downplayed such concerns. Nevertheless, the FOMC statement repeated that “tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain.”
Powell, however, was taking a less strident view than he did earlier this year. Asked about bank credit tightening ahead of next week’s quarterly senior loan officers survey, he said banks are reining in lending, but not necessarily as a result of bank failures.
Bank credit is “broadly consistent with what you would expect,” he said. “You’ve got lending conditions tight and getting tighter — weak demand. And, you know, it gives a picture of a pretty tight credit conditions in the economy.”
“I think it’s really hard to tease out how much of that is from this source or that source, but I think what matters is the overall picture of tightening lending conditions and that’s what the SLOOS will say,” he added.
The meeting took place against a somewhat perplexing economic backdrop. The economy has slowed, but not as much as many had feared. Consumer confidence is up, as is investor confidence, judging from soaring stock prices.
Labor markets have softened a bit, but unemployment remains historically low at 3.6%, and wages continue to grow at a pace which the Fed considers inconsistent with reaching its 2% target. Average hourly earnings rose 4.4% from a year ago in June. The Atlanta Fed puts wage growth even faster — at 5.3%.
At their last meeting, FOMC participants forecast the price index for personal consumption expenditures (PCE), their preferred inflation gauge, will fall to 3.2% overall and 3.8% on a core basis by year’s end, but -as of now core inflation is running much higher.
Inflation has moderated, with the consumer price index rising just 3% from a year earlier in June, down from 4% in May. But core inflation continues to worry policymakers. The CPI excluding volatile food and energy was still up by 4.8% year-over year. Last month’s core PCE (and headline PCE), due Friday, is believed to have grown more slowly, but still far above target.
So, Powell & Co. again decided they have more work to do.
Not surprisingly, the FOMC authorized the New York Federal Reserve Bank to continue shrinking the size of the Fed’s bond portfolio by a combined $95 billion per month by declining to reinvest maturing Treasury and mortgage-backed securities.