By Christopher Rugaber | The Associated Press
In a highly anticipated speech at an annual conference of central bankers in Jackson Hole, Wyoming, Federal Reserve Chair Jerome Powell emphasized the potential need for further interest rate increases due to the continued strength of the U.S. economy. However, Powell also acknowledged the uncertain nature of the economic outlook.
One key factor mentioned by Powell is that the economy has been growing at a faster pace than anticipated, with consumers maintaining robust spending habits. These trends could contribute to sustained inflation pressures. Powell reaffirmed the Fed’s commitment to keeping the benchmark rate elevated until inflation is brought down to its target of 2%.
“We are paying close attention to signs that the economy may not be cooling down as expected,” Powell stated. “If appropriate, we are prepared to raise rates further and we intend to maintain a restrictive policy until we are confident that inflation is moving sustainably towards our objective.”
It is worth noting that while inflation has decreased from its peak, Powell still considers it too high. This reflects his awareness of the challenges faced by the economy and the complexity of the Fed’s response.
Omair Sharif, the chief economist at Inflation Insights, observed that Powell remains cautious about the rapid growth of the economy, as it necessitates higher interest rates to maintain stability. Diane Swonk, chief economist at KPMG, echoed this sentiment, emphasizing Powell’s concern over the need for higher interest rates to control the economy.
Although Powell did not mention the possibility of future interest rate cuts, expectations of rate cuts by early next year have diminished among Wall Street traders. Most traders now project no interest rate cuts until mid-2024 at the earliest.
Powell acknowledged the challenge of determining the precise level at which borrowing costs can effectively moderate the economy and reduce inflation. He emphasized that the Fed’s officials will proceed carefully as they consider whether to tighten policy further or maintain the current rate.
Since Powell’s speech at last year’s Jackson Hole conference, the Fed has raised its benchmark rate to the highest level in 22 years at 5.4%. Inflation, however, has decreased to 3.2% from a peak of 9.1% in June 2022, albeit still surpassing the Fed’s target.
While Powell considers the decline in inflation to be positive news, he recognizes that two months of favorable data are just the beginning of building confidence in sustainable inflation reduction.
In light of milder inflation readings, some economists speculate that the Fed may not proceed with additional rate hikes. Higher long-term rates in the bond market, by slowing growth, could potentially mitigate the need for further rate increases and help alleviate inflation pressures.
Nonetheless, if the Fed decides against rate hikes, it may still need to maintain its benchmark rate at elevated levels to combat inflation. However, this strategy carries the risk of weakening the economy and potentially triggering a downturn. Additionally, it could negatively impact banks by reducing the value of their bond holdings.
Overall, Powell’s speech reveals the Fed’s cautious yet proactive approach to managing the U.S. economy amidst ongoing uncertainties, maintaining a focus on achieving sustainable economic growth and inflation control.
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AP Economics Writer Paul Wiseman contributed to this report from Washington.
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