Fed Chair Jerome Powell warns there could be MORE interest rate hikes if the economy’s surprising resilience keeps inflation above 2% target

Federal Reserve Chairman Jerome Powell has warned that the continued resilience of the US economy could require further rate hikes. He spoke in a closely watched speech that also highlighted the uncertain nature of the economic outlook.

In his speech Friday in Jackson Hole, Wyoming, Powell noted that the economy has grown faster than expected and consumers have continued to spend briskly – trends that could keep inflationary pressures high.

He also reiterated the Fed’s determination to keep policy rates high until annual price increases are reduced to the central bank’s target of 2 percent.

“We are ready to raise interest rates further if necessary and intend to keep policy at a restrictive level until we are confident that inflation is moving steadily downward towards our target,” said the Fed Chairman. .

His speech — at an annual conference of central bankers — highlighted the uncertainties surrounding the economy and the complexity of the Fed’s response to them.

That was in sharp contrast to Jackson Hole’s remarks a year ago, when he bluntly warned Wall Street that the central bank would continue its campaign of sharp rate hikes to contain rising prices.

Powell also said the Fed believes policy rates are high enough to contain the economy and cool growth, employment and inflation. But he said it’s hard to know how high borrowing costs need to be to keep the economy in check, “so there’s always uncertainty” about how effective the Fed’s policies are at curbing inflation.

As a result, the Fed will “proceed with caution as we decide whether to tighten policy rates further or instead keep policy rates constant and await further data,” Powell said.

The Fed Chairman’s Jackson Hole speech comes at a time of heightened uncertainty about the economy and interest rate policy.

Businesses are still hiring and consumer spending has remained resilient, even as inflation has eased to 3.2 percent, down from a peak of 9.1 percent in June 2022.

At the same time, “core” inflation, which excludes volatile food and energy prices, has remained high at 4.7 percent despite the Fed’s series of 11 rate hikes in March 2022.

And by raising the key effective rate from near zero to a 22-year high of 5.33 percent, the Fed has made borrowing much more expensive for consumers and businesses.

For example, rising mortgage rates contributed to a 22 percent drop in home sales in the first seven months of 2023 compared to the same period last year, creating a potential headwind for the economy.

While overall inflation has been steadily declining, the mixed economic picture has in some ways put Powell in a tougher position than he was in Jackson Hole last year when he issued a blunt warning about the Fed’s plans to continue to hike rates rapidly to fight inflation.

Now the Fed faces a subtler challenge: how to navigate a narrow path of slowing growth and further cooling inflation without derailing the economy and triggering a recession. Economists call this rare outcome a “soft landing.”

Many analysts say that despite the progress the Fed has made so far, Powell cannot afford to let his guard down and say something that would sound like a declaration of victory.

Instead, they expect him to indicate his intention to keep interest rates high for as long as necessary. Even if Fed policymakers do not raise borrowing costs further, they are unlikely to lower them any time soon.

A year ago in Jackson Hole, Powell had warned that the Fed’s upcoming rate hikes would “cause some pain for households and businesses.” probably in the form of job losses and possibly a recession.

Raghuram Rajan, an economist at the University of Chicago and former head of India’s central bank, suggested that if Powell is tempted to go the other way this year and predict a “painless disinflation,” he should avoid it.

“The idea that we’ve gone from a painful disinflation to a painless disinflation would undermine the Fed,” Rajan said. It would indicate that they don’t have the courage to do what it takes to curb inflation.

Surprisingly, despite the Fed’s aggressive rate hikes, the US unemployment rate is right where it was when Powell spoke last year: 3.5 percent, barely above a half-century low.

Still, Rajan said he doubts the Fed can meet its 2 percent inflation target without causing any rise in unemployment. A higher unemployment rate would likely slow wage growth and ease inflationary pressures. When layoffs spread, workers are typically less able to get large pay raises.

In an interview this week, Raphael Bostic, president of the Federal Reserve’s Atlanta division, said he favors keeping the Fed’s policy rate at current levels at least well into next year.

In June, when the 18 members of the Fed’s rate-setting committee last issued their quarterly forecasts, they predicted they would hike rates again this year.

That expectation may have changed in light of milder inflation data released by the government in recent weeks. Fed policymakers will revise their interest rate projections at their next meeting from Sept. 19-20.

“We’re just going to have to stay restrictive for a while,” Bostic said, “until we’re sure, sure, sure, sure, sure, sure that inflation won’t bounce back and bubble up far from our target. .’

Bostic said he thinks Fed rates are currently high enough to contain the economy and cool inflation over time. But he added that he “isn’t even considering a cut until the end of 2024.”

Another key figure at the Jackson Hole conference – Christine Lagarde, president of the European Central Bank – will also speak on Friday.

Analysts expect Lagarde to try to keep the ECB’s options open at the next meeting in September. Investors increasingly expect the ECB to refrain from raising interest rates at that meeting.