(Reuters) – Federal Reserve Chair Jerome Powell on Friday said the central bank may need to lift interest rates further to finish the job of lowering inflation on a sustained basis.
His speech at the annual economic symposium hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, covered an expansive range of topics that are key to the outlook for Fed policy. Here are some highlights from his text:
“(W)e are attentive to signs that the economy may not be cooling as expected. So far this year, GDP (gross domestic product) growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust. In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up. Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
U.S. GDP grew at a stronger-than-expected 2.4% annualized rate in the second quarter, and data received so far in the third quarter suggests that pace may have accelerated. The Atlanta Fed’s GDP Now tool is currently tracking growth in the July-through-September period at 5.9%. That is expected to come down as more data comes in but other forecasts, such as the Blue Chip consensus, have also been trending up since the quarter began. The lack of signs of material slowdown has Powell and other Fed officials on alert to take more action if needed.
“The rebalancing of the labor market has continued over the past year but remains incomplete … We expect this labor market rebalancing to continue. Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response.”
Powell has repeatedly said that returning inflation to the Fed’s 2% target would likely require some softening in the job market. While he acknowledged a number of signs that labor market tightness is easing, his remarks suggest policymakers are on alert for indications that progress could stall out or reverse, which could augur for either more rate hikes or an even more extended period of higher rates.
“(R)eal interest rates are now positive and well above mainstream estimates of the neutral policy rate. We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation. But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.”
A key reference point for policymakers is the neutral rate, or the interest rate that neither stimulates nor hinders the economy. Calibrating their policy rate against the estimated neutral rate – which Fed officials as of June estimated at 2.5% – gives officials an idea of just how much pressure they are exerting on the economy.
“Although inflation has moved down from its peak – a welcome development – it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
“(N)onhousing services accounts for over half of the core PCE index and includes a broad range of services, such as health care, food services, transportation, and accommodations … Given the size of this sector, some further progress here will be essential to restoring price stability. Over time, restrictive monetary policy will help bring aggregate supply and demand back into better balance, reducing inflationary pressures in this key sector.”
Powell has placed a heavy emphasis on the inflation rate within the nonhousing services sector for some time, which he noted has only recently shown signs of easing after moving sideways through most of the Fed’s tightening efforts so far. His comment that “further progress here will be essential” emphasizes his dissatisfaction with that limited progress.
“Two percent is and will remain our inflation target. We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to that level over time.”
Powell’s statement puts to rest for now any speculation that the Fed will change its inflation target, as some have suggested might be appropriate if growth tends to remain above trend for an extended period.