- No Clear Signal on Size of Sept. 21 Rate Hike; ‘Unusually Large” Move Possible
- Policy Will Need to Stay Restrictive ‘For Some Time,’ Involve Some ‘Pain’
By Steven K. Beckner
(MaceNews) – Federal Reserve Chairman Jerome Powell Friday strongly reaffirmed the Fed’s
commitment to bringing down inflation Friday, vowing to move monetary policy into a “restrictive”
posture and keep it there “until the job is done.”
He seemed to make a point of discouraging speculation about interest rate cuts in the
foreseeable future, although he said a slowing of the pace of rate hikes will be appropriate at
some point.
Powell, speaking at the Kansas City Federal Reserve Bank’s annual symposium in Jackson
Hole, Wyoming, did not give quite the clear signal of the size of the next rate hike many had
hoped for. Nor did he rule out a third straight 75 basis point hike in the federal funds rate,
reiterating that another “unusually large increase” in that key overnight money market rate is
possible when the Fed’s policymaking Federal Open Market Committee meets Sept. 20-21.
The choice of another 75 basis point rate hike or something smaller will only be made at that
time when more data on inflation, employment and other aspects of economic activity will be in
hand, he said in a much shorter-than-usual presentation.
Powell largely refrained from the kinds of comments he made after the July 27 FOMC meeting
that led some to think the central bank might truncate its monetary tightening and even cut rates
next year.
The Fed chief acknowledged the economy had slowed and that inflation had come down
somewhat, but made clear the FOMC needs to see more evidence that demand relative to
supply is cooling before it will feel confident that the central bank is getting inflation under
control.
He warned monetary policy will likely need to remain restrictive “for some time” and involve both
a “sustained period of below-trend growth” and “some softening of labor market conditions.”
If the FOMC does not act “forcefully,” there is a danger that inflation will become “entrenched” in
public expectations, he told symposium participants meeting in the shadows of the Grand
Tetons.
At some point, he said the FOMC will slow the pace of tightening, but gave no time frame.
The purpose of this year’s symposium, as described by the Kansas City Fed, is to “explore the
emergence of economic constraints during the pandemic and how supply considerations have
returned to center stage.”
“Bottlenecks and shortages have limited economic supply even as historic levels of fiscal and
monetary accommodation have led to a surge in demand, resulting in an imbalance that has
pushed inflation up globally,” a Kansas City Fed statement elaborated.
Powell took the opportunity to frame the Fed’s policy challenge in just those terms as he set the
tone for two days of discussions among central bankers and economists in a keynote speech.
His brief remarks reinforced a monetary strategy he and his FOMC colleagues have been
pursuing for months.
Since the FOMC started raising short-term interest rates from near zero in March, a consistent
theme has been that monetary policy must be tightened to restrict demand relative to limited
supply. That message began to evolve at the time of the FOMC’s second rate hike on May 4 –
one of 50 basis points – when Powell said the Fed’s path to a “soft landing” had narrowed due
to supply-related factors “beyond our control.”
At the FOMC’s next two meetings in mid-June and late July, the funds rate was raised 75 basis
points, leaving the funds rate in a target range of 2.25% to 2.50%. Its policy statement said
“ongoing increases in the target range will be appropriate.”
Since the July meeting, Fed watchers have been trying to ascertain whether the FOMC will
raise the funds rate another 75 basis points on Sept. 21 or be content with a 50 basis point rate
hike.
Powell, who eschewed specific “forward guidance” on July 27, remained vague about the policy
outlook in Jackson Hole.
Recalling his July 27 statement that “another unusually large increase could be appropriate at
our next meeting,” he said, “We are now about halfway through the inter-meeting period. Our
decision at the September meeting will depend on the totality of the incoming data and the
evolving outlook.”
Powell seemed to leave open the possibility of a step-down to a still historically large 50 basis
point rate hike by saying, “At some point, as the stance of monetary policy tightens further, it
likely will become appropriate to slow the pace of increases.”
But on the whole, the tone of his remarks regarding the challenge of returning inflation to the
Fed’s 2% target would have to be described as relatively aggressive, as he repeatedly
emphasized the need to restore “price stability,” which the Fed defines as 2% per year inflation.
“The (FOMC’s) overarching focus right now is to bring inflation back down to our 2% goal,” he
began. “Price stability is the responsibility of the Federal Reserve and serves as the bedrock of
our economy. Without price stability, the economy does not work for anyone.”
Powell warned that defeating inflation, which ran 8.5% in July from a year earlier, will not be
easy or painless. “Restoring price stability will take some time and requires using our tools
forcefully to bring demand and supply into better balance.”
“Reducing inflation is likely to require a sustained period of below-trend growth,” he continued.
“Moreover, there will very likely be some softening of labor market conditions. While higher
interest rates, slower growth, and softer labor market conditions will bring down inflation, they
will also bring some pain to households and businesses. These are the unfortunate costs of
reducing inflation. But a failure to restore price stability would mean far greater pain.”
Powell indicated the FOMC will not be diverted from its anti-inflationary course by slower growth
– at least not the kind of slowing seen thus far.
“The U.S. economy is clearly slowing from the historically high growth rates of 2021, which
reflected the reopening of the economy following the pandemic recession,” he said. “While the
latest economic data have been mixed, in my view our economy continues to show strong
underlying momentum.”
Powell added that “the labor market is particularly strong, but it is clearly out of balance, with
demand for workers substantially exceeding the supply of available workers.”
Inflation dipped in July, but not enough to please Powell. “Inflation is running well above 2%,
and high inflation has continued to spread through the economy. While the lower inflation
readings for July are welcome, a single month’s improvement falls far short of what the
Committee will need to see before we are confident that inflation is moving down.”
Therefore, Powell said he and his FOMC colleagues are “moving our policy stance purposefully
to a level that will be sufficiently restrictive to return inflation to 2%.”
Powell suggested there is much more to be done. Although the current 2.25% to 2.5% funds
rate target range is close to the FOMC’s estimated “longer run” or “neutral’ level, that is not
nearly satisfactory to lower inflation, in his view.
“In current circumstances, with inflation running far above 2% and the labor market extremely
tight, estimates of longer-run neutral are not a place to stop or pause,” he said.
Whatever level the FOMC raises the funds rate to, Powell seemed to ward off hopes of any
hopes of rate cutting anytime soon. “Restoring price stability will likely require maintaining a
restrictive policy stance for some time.”
“The historical record cautions strongly against prematurely loosening policy,’ he continued,
noting that “Committee participants’ most recent individual projections from the June (Summary
of Economic Projections) showed the median federal funds rate running slightly below 4%
through the end of 2023.”
FOMC participants will update their economic and funds rate projections at the September
meeting.
Powell also made a point of saying that the Fed has learned from its experience battling inflation
in the 1970s and 1980s. Among the lessons:
1.) “Central banks can and should take responsibility for delivering low and stable inflation….
2.) “The public’s expectations about future inflation can play an important role in setting the path
of inflation over time. Today, by many measures, longer-term inflation expectations appear to
remain well anchored … . But that is not grounds for complacency, with inflation having run well
above our goal for some time.”
3.) “We must keep at it until the job is done. History shows that the employment costs of bringing
down inflation are likely to increase with delay, as high inflation becomes more entrenched in
wage and price setting.”
Guided by those lessons, Powell vowed, “We are taking forceful and rapid steps to moderate
demand so that it comes into better alignment with supply, and to keep inflation expectations
anchored. We will keep at it until we are confident the job is done.”
A day ahead of Powell’s speech, Fed officials sounded ambivalent about the FOMC’s imminent
policy choice in interviews. Kansas City Fed President Esther George, who went along with the
75 basis point rate hike in July after dissenting in favor of a 50 basis point move in June, said
the Fed has “more work to do,” but gave no clear indication she will vote for another 75 bp hike
on Sept. 21. It’s “too soon to say,” she said.
If anything, the Jackson Hole host suggested the need for caution, saying. “I don’t think we have
seen the effects [of rate hikes] yet. But remember, we are operating in an uncertain time… It will
be important for us to communicate clearly the path ahead, so that those financial conditions
can tighten alongside those rate moves.”
“As I watch the combination of these rate hikes and the balance sheet coming down, it’s going
to be important to see how the economy adjusts to what the Federal Reserve is doing,” George
said.
Atlanta Fed President Raphael Bostic said he was “somewhere between the 75 and the 50” and
said “at this point I’d toss a coin between the two.” Similarly, Philadelphia Fed chief Patrick
Harker said, “Whether it’s 50 or 75 I can’t say right now,” but said even a 50 basis point move
would be “substantial.”
Earlier, St. Louis Fed President James Bullard, George’s fellow voter, had reiterated his familiar
call for another 75 basis point rate hike. Erstwhile dove Neel Kashkari, president of the
Minneapolis Fed, also made hawkish comments.
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Contact this reporter: steve@macenews.com
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