Federal Reserve Chairman Jerome Powell addressed concerns about inflation during a highly anticipated speech delivered to the Economic Club of New York. While acknowledging signs of cooling inflation, he reiterated the Fed’s unwavering commitment to its 2% mandate.
Powell refrained from specifying a policy direction but made it clear that he was not inclined toward raising interest rates at the moment. Futures market traders responded by eliminating any expectations of a rate hike in November and reducing the likelihood of a December move. The central bank’s progress in bringing inflation down was acknowledged, but Powell emphasized the need for continued vigilance.
“Inflation is still too high, and a few 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,” Powell asserted. He emphasized the uncertainty surrounding the duration of lower inflation readings and its eventual trajectory.
While acknowledging that the path ahead may be challenging and time-consuming, Powell emphasized the collective commitment of his colleagues and himself to sustainably reduce inflation to 2%.
The speech raised questions about the Fed’s future course of action after a series of interest rate hikes aimed at curbing inflation. Stock markets experienced an uptick, and the 10-year Treasury yield retreated from its session highs.
Powell expressed the view that current interest rates do not feel excessively tight. However, he acknowledged the difficulty higher interest rates can pose for the economy.
Despite ongoing inflation concerns, recent data indicates a slowing pace of monthly increases, with the annual rate dropping from over 9% in June 2022 to 3.7%. Powell noted the progress made toward the Fed’s dual goals of maximum employment and stable prices.
The speech was briefly delayed by Climate Defiance protesters, who disrupted the event. Nevertheless, Powell continued, underscoring that a sustainable return to the 2% inflation goal may necessitate a period of below-trend economic growth and further softening in labor market conditions.
The Fed’s series of interest rate hikes aimed, in part, to address a supply-demand imbalance in the job market. Since March 2022, the Fed has increased rates 11 times, totaling 5.25 percentage points. This action has raised the benchmark rate to its highest level in over two decades.
Powell reassured that the economy was handling this rate increase well, and the effective lower bound was still distant.
On the same day, initial jobless claims reached their lowest level since early 2023, indicating a tight labor market that could exert upward pressure on inflation. Robust job creation and slow layoffs in September might jeopardize progress on inflation.
“Additional evidence of persistently above-trend growth or a lack of labor market easing could put further progress on inflation at risk, potentially necessitating further monetary tightening,” Powell warned.
Some Fed officials have voiced patience, even among those who favor tighter monetary policy. They are monitoring the lagged effects of rate hikes on the economy and anticipate a pause in additional rate increases.
Markets widely expect the Fed to abstain from further rate hikes, although uncertainty remains regarding when the central bank may contemplate rate cuts.
In summary, Powell’s speech underscored the Fed’s unwavering commitment to controlling inflation while acknowledging the need for a cautious approach in a complex economic landscape. The path forward is uncertain, contingent on incoming data and evolving conditions, and a balance of risks.