Federal Reserve Chair Jerome Powell said on Thursday that the central bank is not ready to declare victory over inflation, and that it may need to tighten monetary policy further to ensure price stability.
Speaking at an International Monetary Fund conference in Washington, Powell said that inflation has cooled considerably in recent months, but it remains up 3.7% compared with the same time one year ago. He said that the Fed is wary of being “misled” by good data on prices, and that the mission to return inflation to its 2% target had a “long way to go”.
“We know that ongoing progress toward our 2% goal is not assured: Inflation has given us a few head fakes,” Powell said. “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”
He said that the Fed is carefully balancing the risk that inflation could reignite versus the risk that the central bank could cause unnecessary economic damage. He said that the unwinding of pandemic-related supply and demand distortions is playing an important role in the decline of inflation, but that demand will likely have to slow for the Fed to be confident that inflation is on track to cool to 2%.
“Going forward, it may be that a greater share of the progress in reducing inflation will have to come from tight monetary policy restraining the growth of aggregate demand,” he said.
Fed has raised interest rates sharply over the past year
The Fed has raised interest rates sharply over the past year, approving 11 rate increases in the hopes of crushing inflation and cooling the economy. In the span of just 16 months, interest rates surged from near zero to above 5%, the fastest pace of tightening since the 1980s.
The Fed’s aggressive actions have sparked criticism from some quarters, including President Joe Biden, who has blamed the central bank for slowing down the economic recovery and hurting the middle class. Biden has also nominated a new Fed chair, Lael Brainard, to replace Powell when his term expires in February. Brainard is seen as more dovish than Powell, and more supportive of Biden’s fiscal agenda.
However, Powell has defended the Fed’s independence and its mandate to maintain price stability and maximum employment. He said that the Fed’s rate hikes have been necessary to prevent inflation from becoming entrenched and eroding the purchasing power of Americans. He also said that the Fed’s policy stance is not excessively tight, and that it remains accommodative for the economy.
“We are not confident that we have achieved such a stance,” he said. “Our policy stance remains consistent with our statutory objectives and with the broad economic conditions we face.”
Investors are bullish about another pause in rate hikes
Despite Powell’s caution, investors are bullish about another pause in rate hikes next month, with financial markets pricing in a more than 90% chance of the Fed holding rates steady for a third time, according to the CME FedWatch Tool. The Fed’s next policy meeting is scheduled for December 14-15, and it will be the last one under Powell’s leadership.
Investors are betting that the Fed will take a wait-and-see approach, as inflation pressures ease and the economy shows signs of resilience. The US economy grew at an annualized rate of 2.1% in the third quarter, slightly faster than expected, and the unemployment rate fell to 4.6% in October, the lowest level since the pandemic began.
However, Powell warned that the economic outlook remains uncertain, and that the Fed will continue to monitor the data and adjust its policy accordingly. He said that the Fed is prepared to act swiftly and decisively if inflation expectations become unanchored, or if the economy faces a significant shock.
“We will continue to communicate our policy strategy as clearly as possible, and we will do our utmost to support the economy through this challenging period,” he said.