Jerome Powell says inflation is too high in Jackson Hole

Powell noted that the economy has been growing faster than expected and that consumers have continued to spend rapidly, trends that could keep inflationary pressures high. He reiterated the Federal Reserve’s determination to keep its benchmark rate elevated until inflation comes down to its 2% target.

“We are watching for signs that the economy may not be cooling as expected,” Powell said. “We are prepared to further increase rates if appropriate and intend to keep policy tight until we are confident that inflation is sustainably declining toward our target.”

“Although inflation has come down from its peak – a welcome development – it is still too high.”

Powell’s speech, at an annual conference of central bankers in Jackson Hole, Wyoming, highlighted the uncertainties surrounding the economy and the complexity of the Federal Reserve’s response to it. He marked a contrast to his comments here a year ago, when he bluntly warned that the Federal Reserve would continue its campaign of sharp rate hikes to curb rising prices.

“When it comes to another rate hike, the president still has his finger on the trigger, although he’s a bit less itchy than last year,” said Omair Sharif, chief economist at Inflation Insights.

Substantially higher credit rates, a direct result of the Federal Reserve’s rate hikes, have made it harder for Americans to buy a home or car or for businesses to finance expansions. At the same time, items like rent, restaurant meals, and other services continue to cost more. “Core” inflation, which excludes volatile food and energy prices, has remained high despite the Fed’s run of 11 rate hikes starting in March 2022.

Nevertheless, the economy in general has advanced. Hiring has remained healthy, confounding economists who had predicted the rate hike would lead to widespread layoffs and a recession. Consumer spending continues to grow at a healthy pace. And the US unemployment rate remains exactly where it was when Powell spoke last year: 3.5%, just above the half-century low.

“He’s still very concerned about how fast the economy is growing because that actually means that, all things being equal, we need higher interest rates just to be restrictive,” said Diane Swonk, chief economist at KPMG.

In his speech, Powell did not mention the possibility that the Federal Reserve would eventually cut interest rates. Earlier this year, many on Wall Street expected rate cuts early next year. Now, most traders don’t expect interest rate cuts before mid-2024 at the earliest.

Powell said central bank officials believe his key rate is high enough to slow down the economy and cool growth, hiring and inflation. But he acknowledged that it’s hard to know how high borrowing costs need to be to slow the economy, “and therefore there’s always uncertainty” about how effective the Federal Reserve’s policies are in reducing inflation.

Federal Reserve officials “will proceed carefully as we decide whether to tighten the rate further or instead hold the policy rate constant and await more data,” he said.

Since Powell spoke at the Jackson Hole conference last summer, the Federal Reserve has raised its benchmark rate to a 22-year high of 5.4%. From a peak of 9.1% in June 2022, inflation has slowed to 3.2%, though still above the Federal Reserve’s 2% target.

Powell acknowledged the drop in inflation, which he described as “very good news.” Consumer prices, excluding the volatile food and energy categories, have started to decline.

“But two months of good data,” he added, “is just the beginning of what it will take to build confidence that inflation is coming down sustainably toward our target.”

In June, when the 18 Federal Reserve Boards last issued their quarterly projections, they predicted they would raise rates yet again this year. However, that expectation could have changed in light of the softer inflation readings the government has issued in recent weeks. Officials will update their interest rate projections at their next meeting on September 19-20.

Some Federal Reserve officials, including John Williams, president of the Federal Reserve Bank of New York, a top official on the committee that sets interest rates, have suggested that the central bank may be nearing the end of its rate hikes. .

Many economists have postponed or reversed their earlier forecasts for a US recession. Optimism has grown that the Federal Reserve will achieve a difficult “soft landing” – in which it would succeed in bringing inflation down to its target level without causing a deep recession.

Many traders in the financial markets foresee not only a soft landing but also an acceleration of growth. Those expectations have helped fuel a rise in bond yields, particularly 10-year Treasuries, which heavily influence long-term mortgage rates. Consequently, the average fixed rate on a 30-year mortgage has reached 7.23%, the highest level in 22 years. Car loans and credit card rates have also skyrocketed and could weaken consumer borrowing and spending, the lifeblood of the economy.

Emily Roland, co-head of investment strategy at John Hancock Investment Management, is among the analysts who still doubt the Federal Reserve will achieve a soft landing.

“The lagged impact of all the tightening that the Federal Reserve has done (the biggest we’ve seen in decades) will likely hit and push the economy into a recession,” he said. “It’s just taking a while to get there.”

Similarly, Sonia Meskin, the US macroeconomic director at BNY Mellon Investment Management, said she is concerned that financial markets are “underestimating the chances of a harder, delayed landing.”

“Much of the adjustment may still be in the pipeline,” Meskin said, and the full impact of the higher rates may not arrive until next year.

Some economists say they believe much higher long-term rates in the bond market could reduce the need for further Fed hikes because, by slowing growth, those long-term rates should help cool inflationary pressures. In fact, many economists say they believe the Federal Reserve’s rate hike in July will be its last.

Even if the Fed doesn’t impose any more hikes, it may still feel compelled to keep its benchmark rate high long into the future to try to contain inflation. This would introduce a new threat: keeping interest rates at high levels indefinitely would risk weakening the economy to the point of triggering a slowdown. It could also endanger many banks by reducing the value of the bonds they hold, a dynamic that helped bring about the collapse of Silicon Valley Bank and two other big lenders last spring.

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AP economics writer Paul Wiseman contributed to this report from Washington.