The Federal Reserve is prepared for additional interest rate hikes and will maintain a restrictive economic policy until inflation falls to its long-term target of 2 percent, Chair Jerome Powell said Aug. 25 during the Jackson Hole Economic Symposium.
“Although further unwinding of pandemic-related distortions should continue to put some downward pressure on inflation, restrictive monetary policy will likely play an increasingly important role,” Powell said. “Getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions.”
Powell’s comments came after the Federal Open Market Committee raised its benchmark federal funds rate 25 basis points last month to a range of 5.25 to 5.5 percent. It is unclear whether the FOMC will raise rates once again during its Sept. 20-21 meeting. Since August 2022, the FOMC has raised the policy rate by 300 basis points and considerably reduced the size of its securities holdings.
There are signs the economy is cooling, Powell said, including slowed loan growth and industrial production. However, other signs point to a still-strong economy: Job openings have fallen without a corresponding rise in unemployment. GDP growth has been above expectations and higher than its longer-term trend. Recent consumer spending reports have been strong.
On a 12-month basis, core PCE inflation peaked at 5.4 percent in February 2022 and has since fallen to 4.3 percent. Powell attributed high inflation to several factors, including supply and demand imbalances caused by the pandemic and Russia’s ongoing war in Ukraine.
“The lower monthly readings for core inflation in June and July were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” he noted. “We can’t yet know the extent to which these lower readings will continue or where underlying inflation will settle over coming quarters.”
Powell acknowledged the Fed’s dilemma in reducing inflation. “Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment,” he added. “Doing too much could also do unnecessary harm to the economy.”
Powell’s comments came approximately three weeks after Federal Reserve Gov. Michelle Bowman said she expects additional rate hikes will be necessary to bring down inflation. “It’s important to reiterate that monetary policy is not on a preset course,” she said Aug. 5 at an annual meeting sponsored by the Kansas Bankers Association. “My colleagues and I will make our decisions based on the incoming data and its implications for the economic outlook. We should remain willing to raise the federal funds rate at a future meeting if the incoming data indicate that progress on inflation has stalled.”