Jerome H. Powell, the chair of the Federal Reserve, stated on Thursday that he anticipates a continued slower pace of interest rate increases following the decision to hold rates steady in June. This marks the first time in 11 policy meetings that the central bankers have not raised interest rates. However, Powell did not rule out the possibility of returning to consecutive rate moves in the future.
During a conference in Madrid, Powell reiterated his previous statement that consecutive rate increases are still on the table, but he expects a more patient approach going forward. He explained that the decision to hold rates in one meeting was a moderation of the pace, and he anticipates a similar approach as long as the economy evolves as expected.
However, Powell also acknowledged that the economy often behaves differently than policymakers anticipate.
In 2022, the Fed raised interest rates rapidly with three-quarter-point increases. They later shifted to a half-point increase and have progressively moved towards smaller and less frequent adjustments. The purpose of raising interest rates is to slow down economic growth and reduce inflation by decreasing consumer and business demand. The Fed officials aim to slow the economy gradually without causing a sudden halt.
Currently, the Fed expects to raise their policy rate two more times in 2023, bringing it from just above 5 percent to just above 5.5 percent. If these increases occur at every other meeting, we could see rate hikes in July and November.
However, there is significant uncertainty surrounding this forecast. Investors have a low probability expectation of two more rate increases by the end of the year. They believe it is more likely that the Fed will only raise rates once in 2023 as the economy slows down and inflation cools.
Powell noted that the Fed has often been wrong in the past, overestimating how quickly price increases moderate.
“We’ve consistently seen inflation be more persistent and stronger than expected,” Powell remarked. He further pondered whether a 5 percent interest rate, which was unthinkable before the pandemic, is now tight enough as a policy measure.
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