Federal Reserve Chair Jerome Powell delivered a sobering message on Friday, saying that the US economy still faces significant challenges from high inflation and that the central bank is prepared to raise interest rates further if needed.
Powell’s speech at Jackson Hole
Powell was speaking at the annual symposium of the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, a gathering of global central bankers and economists that is closely watched by markets and policymakers.
In his speech, Powell acknowledged that inflation has declined from its peak in June, when it reached a 40-year high of 9%, but said it remains too high and above the Fed’s 2% target.
He said the Fed has tightened monetary policy significantly over the past year and a half, raising its benchmark interest rate 11 times to a 22-year high of 6.5%. He said the Fed intends to hold policy at a restrictive level until it is confident that inflation is moving sustainably down toward its goal.
Powell said the Fed is “prepared to raise rates further if appropriate” and will “proceed carefully” as it decides whether to tighten further or hold steady.
He said the Fed’s job is to bring inflation down to its 2% goal and that it will “keep at it until the job is done”.
Powell’s outlook on the economy
Powell also gave an update on the state of the US economy, which he said has shown resilience and strength despite the pandemic and its aftermath.
He said consumer spending, which accounts for about 70% of economic activity, has been “especially robust” and that the labor market has recovered most of the jobs lost during the crisis.
He said the housing sector, which had been cooling earlier this year, may be rebounding as mortgage rates have fallen in recent months.
He said the economy continues to grow above its long-term trend and that growth prospects remain favorable.
However, he also noted some risks and uncertainties facing the economy, such as the spread of new variants of the coronavirus, supply chain disruptions, geopolitical tensions, and financial market volatility.
He said the Fed is “attentive to signs that the economy may not be cooling as expected” and that if growth remains strong, it could put further pressure on inflation and warrant more policy tightening.
Powell’s message to markets
Powell’s speech was eagerly anticipated by investors, who have been nervous about the Fed’s policy stance and its impact on asset prices.
Some analysts had expected Powell to signal a more dovish tone, given the recent moderation in inflation and some signs of slowing growth.
However, Powell did not offer any hints of an imminent pause or reversal in rate hikes, nor did he indicate any plans to taper or end the Fed’s bond-buying program, which has been supporting financial markets since last year.
Instead, Powell reiterated his commitment to fighting inflation and his willingness to raise rates further if needed.
He also stressed that the Fed’s policy decisions will depend on incoming data and that the Fed will remain flexible and responsive to changing conditions.
He said the Fed is “navigating by the stars under cloudy skies” and that it faces a “complex and challenging” task of achieving a “soft landing” for the economy.
Powell’s message was clear: The fight against inflation is not over and the Fed is not ready to ease up on its policy tightening.