In a speech at the Jackson Hole retreat, Federal Reserve Chair Jerome Powell acknowledged the central bank’s uncertainty regarding the need for potential interest rate hikes. Powell emphasized a cautious approach in light of the “cloudy” economic outlook and stated that any decision would depend on the assessment of incoming data.
Focus on Inflation Target
Powell reiterated his commitment to achieving the 2% inflation target but dismissed suggestions of increasing the target. Despite recent favorable inflation readings, he stressed that more was needed and declared inflation to still be “too high.” Powell emphasized the readiness of the central bank to raise rates further if deemed appropriate, and expressed the intention to maintain a restrictive policy until they are confident that inflation is sustainably moving towards their objective.
Economic Growth and Market Conditions
While some analysts anticipate reacceleration of economic growth in the third quarter, Powell acknowledged that it may impact the Fed’s view on interest rates, suggesting that there may be potential changes to its current stance. The central bank remains “attentive” to these signs, noting that attaining the 2% inflation target may require a period of below-trend economic growth as well as some softening in labor market conditions.
Additional Evidence of Above-Trend Growth Raises Inflation Concerns
Federal Reserve Chair Jerome Powell has warned that persistently above-trend growth could pose risks to inflation and may necessitate further tightening of monetary policy. Powell also indicated that rate hikes might be necessary if the labor market strengthens, as evidence of the tightness in the labor market no longer easing could warrant a monetary policy response.
However, Powell acknowledged that there are factors contributing to slower growth, such as the recent rise in long-term bond yields and more stringent bank lending standards. These conditions have led to tighter financial conditions, which typically result in a slowdown in economic activity.
Powell also recognized that the full impact of the Fed’s rapid tightening over the past year and a half may not have been fully felt yet. Given the wide range of estimates regarding these lags, there could still be a significant drag on the economy in the future.
While some Fed officials believe that the effects from previous rate hikes have already affected the economy, others advocate for further rate increases this year. In June, the Fed projected one more rate hike, bringing the benchmark rate to a range of 5.25%-5.5%. With three meetings remaining in 2023, the decision on monetary policy will be closely monitored.
