Fed Chair Warns US Inflation Battle Not Over – Jerome Powell, the Chair of the Federal Reserve, delivered a significant speech on Friday, cautioning that the battle against inflation in the United States remains ongoing. Addressing the annual conference of central bankers hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, Powell emphasized that inflation levels are still elevated and indicated the possibility of further interest rate hikes to address the situation.
The central bank will “keep at it until the job is done”, said Powell. In July, the Federal Reserve implemented the highest interest rate increase in 22 years, marking its 11th such increase within a 17-month span. Although the annual inflation rate has experienced a significant drop from the peak of 9% in June of the previous year to nearly 3%, the economic landscape has continued to pose challenges for Powell amid the US recovery from the pandemic and its aftermath.
Despite the substantial rate hike, consumer spending and the job market in the US have displayed resilience. Additionally, while the overall inflation rate has decreased, essential commodities like food, housing, and gas continue to exhibit prices well above pre-pandemic levels. Powell has said that the Fed is aiming to achieve a “soft landing” for the economy, bringing down inflation without causing a sharp spike in job losses.
But Powell has also acknowledged that the historically sharp increase in rates may not yet be reflected in the wider economy. “We are navigating by the stars under cloudy skies,” said Powell. Powell said Fed policymakers would “proceed carefully as we decide whether to tighten further.” “It is the Fed’s job to bring inflation down to our 2% goal, and we will do so,” Powell said. “We have tightened policy significantly over the past year. “
“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.” Powell said the Fed was “attentive to signs that the economy may not be cooling as expected”, with consumer spending “especially robust” and the housing sector possibly rebounding.
The economy continues to grow above trend, Powell said, and if that continues, “it could put further progress on inflation at risk and could warrant further tightening of monetary policy.” His comments revealed the Federal Reserve struggling to reconcile conflicting signals from an economic landscape where inflation, according to some interpretations, has significantly decelerated without causing substantial harm to the economy.
This is a positive outcome, but it has also led to the question of whether the Fed’s current policy might not be restrictive enough to accomplish its objectives. He noted the challenge of precisely determining to what extent the Fed’s existing benchmark interest rate of 5.25% to 5.5% has actually reached the “neutral” interest rate required to slow down the economy. As a result, assessing the current state of policy is quite complex.
Powell reiterated the familiar Fed assessment of inflation progress, highlighting the decrease in goods inflation following the pandemic-induced spike and anticipating a decline in housing inflation as well. However, he expressed concern that sustained consumer spending across a wide range of services and a tight labor market could hinder the return of inflation to the target rate of 2%.
A recent decline in measures of underlying inflation, stripped of food and energy prices, “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,” Powell said. “Given the size” of the broader services sector, excluding housing, “some further progress will be essential,” the Fed chief said, and it will likely require an economic slowdown to deliver it.