US Fed Chair Pledges to Keep Tight Policy in Place Amid Lingering Inflation Concerns
During a highly anticipated speech at the annual economic symposium in Jackson Hole, Wyoming, US Federal Reserve Chair Jay Powell delivered a hawkish message, stating that the central bank is prepared to maintain a restrictive policy until inflation is moving sustainably down towards its target. Powell warned that while inflation has come down from its peak, it remains too high, indicating the possibility of further interest rate increases if price pressures persist.
Acknowledging that the effects of previous rate hikes have yet to materialize fully, Powell emphasized the Fed’s focus on the upside risks to inflation. He explained that additional evidence of persistently above-trend growth could jeopardize progress on inflation and potentially necessitate further tightening of monetary policy. Powell also highlighted the need for below-trend economic growth and softening labor market conditions to achieve the Fed’s inflation target.
The Federal Reserve now faces the challenge of determining whether a further increase in the benchmark policy rate is necessary, as well as how long rates should stay elevated before considering any cuts. The expectation is that the central bank will likely refrain from raising rates at its upcoming policy meeting in September, with some market participants anticipating a final quarter-point increase in late October. Rate cuts are not anticipated until well into 2024.
Powell’s remarks come at a tense moment for financial markets, which have recently struggled to digest a surge in US borrowing costs. The real yield on the benchmark 10-year Treasury note, adjusted for inflation, is currently at its highest level in over a decade. Mortgage rates have also surged.
Economists argue that the process of bringing inflation back to the Fed’s 2 percent target will be gradual, requiring the central bank to keep its benchmark rate higher for an extended period. This higher-for-longer approach is further supported by the likelihood that the neutral rate of interest, known as R-star, is higher than in the past due to stronger-than-expected growth, increasing government deficits, and amplified investment in domestic manufacturing and green technology.
Overall, Powell’s remarks signal the Fed’s commitment to maintaining a tight policy stance until inflation is under control. The central bank’s attention to the upside risks posed by inflation suggests the potential for further interest rate hikes if necessary. Market participants will closely monitor future Fed actions and economic data to gauge the trajectory of monetary policy and its impact on inflation and the broader economy.
