(Bloomberg) — Federal Reserve Chairman Jerome Powell has signaled that the U.S. central bank is likely to continue raising interest rates and keep them elevated for some time to quell inflation, and he pushed back against any idea that the Fed will change course soon.
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“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks prepared for the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “Historical evidence strongly cautions against premature policy easing.”
He said getting inflation back to the 2% target was “the main focus of the central bank at the moment”, although consumers and businesses would feel economic pain. He reiterated that another “unusually large” increase in the benchmark borrowing rate could be in order when officials meet next month, although he did not commit to one.
“Our decision at the September meeting will depend on the aggregate of incoming data and the changing outlook,” he said.
Investors reacted to the speech by extending the rise in short-term Treasury yields. The 2-year note rose to 3.44%, while the 2- to 10-year yield curve resumed its flattening. Stocks were slightly lower.
Before Powell’s speech, investors saw the odds of a hike of half a point or another three-quarters of a point at the Fed’s Sept. 20-21 meeting as roughly equal. They remained in that range after he spoke, but the size of the Fed’s 2023 rate cuts briefly eased.
“Restoring price stability will take some time and requires using our tools forcefully to bring supply and demand into better balance,” Powell said in comments that were set to be broadcast live for the first time from inside the the lodge where the 1982 event took place.
Other Fed spokesmen in recent days also defied expectations that the Fed would quickly adopt a restrictive policy stance and then begin to ease.
Restoring price stability will require a “prolonged” period of below-trend growth and a weaker labor market, Powell said. “While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring some pain to households and businesses,” he said.
Powell’s remarks at the meeting, which brings together top policymakers from around the world, come as US central bankers face the highest inflation in 40 years. Officials have been slow to recognize the risk and are now acting aggressively to prevent prices from accelerating further. Officials raised rates by 75 basis points at their last two meetings and signaled that the same could be on the table again when they meet next month.
Critics lambasted the Fed for failing to anticipate the spike in inflation that the Fed initially thought would be transitory. Powell told the conference in his address a year ago that price pressures are limited to a relatively narrow group of goods and services. But within months it spread, and by the time the Fed started raising rates from near-zero inflation, it was already three times their 2% target.
It remains high: Inflation, the Fed’s preferred measure, rose 6.3 percent in the 12 months ending in July, according to a government report released earlier Friday, while the core measure minus food and energy rose 4. 6%. The yield on 2-year US government bonds fell to their lowest levels of the day after the report.
“While the lower inflation reading for July is welcome, a one-month improvement is far from what the committee will need to see before we can be sure that inflation is moving lower,” the Fed chief told the audience. gathered in person after two years to hold the conference virtually because of the pandemic.
“We are moving our policy stance purposefully to a level that will be restrictive enough to bring inflation back to 2%.”
Fed officials in June forecast rates would rise to 3.4% by the end of this year, according to their median estimate, and 3.8% by the end of 2023. They will update those forecasts in September. Investors were pricing in the likelihood of cuts in the last half of 2023, although Fed officials are beginning to challenge that view.
Looking beyond the current cycle of interest rate hikes, policymakers are trying to assess whether longer-term inflationary pressures will remain sustainable. Supply chain costs may shift higher and the US labor supply may remain tight for years to come due to an aging population and limited immigration.
Powell said the labor market was “clearly imbalanced,” with demand for workers “significantly” outstripping supply.
The U.S. unemployment rate hit a five-decade low of 3.5 percent in July, with wages fully recovering to pre-pandemic levels.
Ahead of Powell’s speech, several Fed officials stressed that the central bank was by no means ready, with Kansas City Fed President Esther George noting that the destination of the federal funds rate could be higher than markets are pricing in. now.
“We need to raise interest rates to slow demand and bring inflation back to our target,” said George, who voted on monetary policy this year.
In the financial markets, the reference interest rate on loans reaches a peak below 4% at the beginning of next year.
Asked how high the Fed should raise borrowing costs, George said there was “more room to work” and dismissed bets in financial markets that the central bank would start cutting rates next year.
“I think we’re going to have to hold — it could be over 4%.” I don’t think it’s out of the question,” she said in an interview with Bloomberg Television. “I don’t think you’ll know that until you start watching the data signs.”
(Updates with market reaction in paragraph five.)
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