– Powell Says FOMC Prepared to Go Higher But Will ‘Proceed Carefully’
– Fed Officials Project Fewer Rate Cuts in 2024 Than Previously
By Steven K. Beckner
(MaceNews) – The Federal Reserve left short-term interest rates unchanged Wednesday but indicated that at least one additional rate hike is probable before the year is out.
After raising the federal funds rate by 25 basis points in July, the Fed’s rate-setting Federal Open Market Committee left that key money market rate in a 5.25% to 5.5% target range Wednesday but retained a tightening bias in its policy statement, which Chair Jerome Powell reinforced in a post-FOMC press conference.
While welcoming moderation of inflation and cooling in the labor market, Powell said he and his fellow policymakers want to see more progress toward their 2% inflation target and made clear they are prepared to tighten monetary policy as needed to achieve that goal.
“We are prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we are confident that inflation is moving down sustainably toward our objective,” he said, but he added that the FOMC is “in a position to proceed carefully.”
Powell said that, after 525 basis points of cumulative tightening,” interest rates are “meaningfully positive” in real terms, and he said the Fed is “close” to where it needs to be. But he and he and his colleagues believe “one more hike” before year’s end is needed.
Underscoring Powell’s message, FOMC participants continued to project another quarter point rate hike at one of the Committee’s remaining two meetings of 2023, while substantially lessening the amount of rate cuts previously projected for next year.
Fed officials again envisioned rate cuts next year, but not nearly as many as it had earlier in the year, implying that the FOMC will keep the funds rate at levels which Powell called “restrictive” until fairly late in 2024.
Since it stopped holding it near zero in March 2022, the FOMC has raised the funds rate 11 times, but it may not be done. Its policy statement reiterated, “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent 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.”
That constitutes a form of asymmetric “forward guidance.”
Unlike when it paused raising rates in June, the FOMC did not employ language saying that “holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy.” By not saying “at this meeting,” the FOMC could be seen as slightly softening the tightening bias.
Instead of calling growth “moderate,” as in its July 26 statement, the FOMC described it as “solid” and called job gains “strong.” The Committee reiterated that “inflation remains elevated,” forcing it to be “highly attentive.”
In a revised, quarterly Summary of Economic Projections, the 19 FOMC participants projected that the funds rate will end 2023 at a median 5.6%, the same as in the June SEP. Seven of the 19 wanted to keep the funds rate unchanged through the remainder of the year.
Next year, they projected the funds rate will end at 5.1% compared to 4.6% in June. That is a sharp reduction in expected rate cuts, especially when compared to the March projection of 4.3%.
The downward revisions in rate cut projections imply a “higher for longer” policy stance and a delay in any “easing” until late next year.
The revised rate projections were accompanied by notable changes in FOMC participants’ economic forecasts.
They now see inflation, as measured by the price index for personal consumption expenditures (PCE), ending this year at 3.3% and next year at 2.5%, compared to 3.2% and 2.5% in the June SEP. They forecast the core PCE to end 2023 at 3.7% and 2024 at 2.6%., compared to June forecasts of 3.9% and 2.6%.
The officials now see the unemployment rate ending at 3.8% this year and 4.1% next year – down from 4.1% and 4.5% in June.
GDP is now forecast to grow by 2.5% in 2023, up from 1.0% in June and by 1.5% in 2024, up from 1.1%.
Significantly, FOMC participants kept their “longer run’ funds rate estimate, which includes the 2% inflation target plus an estimate of the real equilibrium short-term interest rate, unchanged at 2.5%, despite increasing talk that real rates have risen.
In addition to standing pat on its rate setting, the FOMC also left unchanged its “quantitative tightening” strategy of reducing its portfolio of Treasury and agency mortgage backed securities by a combined $95 billion per month. And Powell gave no indication the passive shrinkage of the Fed’s balance sheet will stop anytime soon. “
The unanimous vote included newly installed Governor Adriana Kugler.
Answering questions about the FOMC decision, Powell spoke of the need for modest further tightening to gain “confidence” that inflation is on its way to 2%, but repeatedly said the FOMC can “proceed carefully.”
He emphasized that the FOMC’s decision to stand pat does not mean the end of tightening: “(T)he fact that we decided to maintain the policy rate at this meeting doesn’t mean we have decided that we have or have not at this time reached that stance of monetary policy that we are seeking.”
Indeed, Powell said, “we are prepared to raise rates further as appropriate.”
The Fed chief said he and his colleagues “see the current stance of monetary policy as restrictive, putting downward pressure on economic activity, hiring and inflation….” He went on to call real rates “meaningfully positive.”
“We need policy to be restrictive so that we can get inflation down to target and we are going to need that to remain to be the case for some time,” he added.
But that doesn’t mean monetary policy is “sufficiently restrictive” to achieve the Fed’s inflation goal, Powell made clear, although he said “we don’t really know” where rates ultimately need to go…, and that’s why, again, we are in a position to proceed carefully at this point.”
“A year ago we proceeded pretty quickly to get rates up,” he continued. “Now, we are fairly close, we think, to where we need to get. It’s just a question of reaching the right stance. I wouldn’t attribute huge importance to one hike in macroeconomic terms. Nonetheless, we need to get to a place where we are confident that we have a stance that will bring inflation down to 2% over time.”
Powell said “a majority of participants believe it is more likely than not that …. it will be appropriate for us to raise rates one more time in the two remaining meetings this year.”
“Others believe that we have already reached that,” he went on. “So, it’s something where we are not making a decision by deciding about that question by deciding to just maintain the rate and await further data.”
Again and again, Powell talked about the need to be “confident” and “convinced” that inflation is headed down to 2%, and he welcomed the “good readings” on core inflation of the last three months, but he revealed that inflation data are not the only factor influencing Fed policymakers to drive rates higher.
Talking of why FOMC participants had increased their “dots” for this year and next year, he said, “I think broadly, stronger economic activity means rates, we have to do more with rates…”
Although FOMC participants did not revise up their estimate of the longer run or “neutral” funds rate,” Powell acknowledged that “you do see people raising their estimates of the neutral rate. And it’s certainly plausible that the neutral rate is higher than the (2.5%) longer run rate.”
Powell suggested the FOMC will be feeling its way along to find the “appropriate” funds rate.
“We want to reach something that we are confident gets us to that (2% inflation) level, and I think confidence comes from seeing …. enough data that you feel like, ‘yes, okay, this feels like we can for now decide that this is the right level, and just agree to stay here,’” he said.
“We are not permanently deciding not to go higher but let’s say if we get to that level,” he continued. ‘Then the question is how long do you stay at that level and that’s another set of questions. For now the question is trying to find that level where we think we can stay there.”
“And we haven’t gotten to a point of confidence about that yet,” he added.
Elaborating on his “careful” policy approach, Powell said, “I think we have come very far very fast in the…rate increases we have made, and I think it was important at the beginning that we moved quickly, and we did. And I think as we get closer to the rate that we think the stance of monetary policy we think is appropriate to bring inflation down to 2% over time, you know, the risks become more two-sided and a risk of over tightening and the risk of under tightening becomes more equal.”
“And I think the natural common-sense thing to do is as you approach that, you move a little more slowly as you get closer to it,” he continued. “That’s what we are doing. So we are taking advantage of the fact that we have moved quickly to move a little more carefully now as we … find our way to the right level of restriction that we need to get inflation back down to 2%.”
Powell did not use the word “patient” to describe the FOMC’s future strategy, but implied as much: “We don’t need to be in a hurry in getting to a conclusion about what to do. We can let the data evolve.”
The Fed Chairdid not back away from his hope for a “soft landing,” which has been criticized by some as undermining his commitment to defeating inflation.
“I’ve always thought that the soft landing was a plausible outcome, that there was a path, really, to a soft landing,” he said. “I have thought that and I’ve said that since we lifted off.”
Powell conceded that the path to a soft landing may have narrowed, but reiterated, “I do think it’s possible, and … this is why we are in a position to move carefully, again, that we will restore price stability ….”
“We know the public depends on us doing that, and we know that we have to do it so that we can achieve the kind of labor market we all want to achieve which is an extended period, sustained period of strong labor market conditions that benefit all…,” he continued. “So I think that’s the end we are trying to achieve …..”