Federal Reserve Chairman Jerome H. Powell reiterated the Fed’s commitment to proceed “cautiously” with further interest rate moves in a speech on Thursday. But he added that if the economic data continues to be hot, the central bank may have to raise interest rates further.
Mr. Powell tried to paint a balanced picture of the challenge facing the central bank in remarks before the New York Economic Institute. He emphasized that the central bank is trying to weigh two goals against each other: it wants to keep inflation fully under control, but it also wants to avoid doing too much and hurting the economy unnecessarily.
Still, it’s a troubling moment for the central bank, as the economy is behaving surprisingly well. Officials have raised interest rates rapidly in the last 19 months from 5.25 to 5.5 percent. Policymakers are now debating whether to raise rates one more time in 2023.
In order to reduce inflation, higher borrowing costs will reduce economic activity—slowing home purchases, business expansions, and all forms of demand. But so far, growth has been unexpectedly resilient. Consumers They spend. Companies are hiring. While wage gains have moderated, overall growth has been strong enough that some economists question whether the economy is slowing inflation enough to meet the central bank’s 2 percent target.
“We are focusing on the latest data showing the slowdown in economic growth and demand for labor,” Mr. Powell agreed Thursday. “Further evidence of sustained above-average growth, or tightening in the labor market no longer easing, could put further upside in inflation at risk and warrant further tightening of monetary policy.”
Mr. Powell called the latest growth data a “surprise” and said it came as consumer demand was much stronger than expected.
“Rates have been inadequate for a long time,” he said, adding that “there is no evidence that policy is too tight now.”
Economists interpreted his comments as opening the door to a possible rate hike after that, although the central bank is unlikely to raise interest rates at its upcoming meeting, which ends on November 1. The central bank’s year-end meeting on Dec. Ends on 13th.
“It doesn’t look like he’s eager to raise rates again in November,” said Michael Feroli, chief U.S. economist at JPMorgan, explaining that he thinks the Fed will depend on the data to decide what to do in December.
“He’s certainly not closing the door on further rate hikes,” Mr. Ferroli said. “But he’s not signaling that anything is imminent.”
Kathy Postjanczyk, chief economist at Nationwide Mutual, said sentiment was “balanced because there is so much uncertainty.”
There were reasons for the Fed chair to keep his options open. Although growth is strong in recent data, the economy is poised for a more significant slowdown.
The central bank has already raised short-term interest rates a lot, and those moves “could be even trickier” to slow the economy, Mr. Powell noted. Importantly, long-term interest rates in the markets have risen sharply in the past two months, making it more expensive to borrow money to buy a house or a car.
Those tough financial conditions could hurt growth, Mr. Powell said.
“Financial conditions have tightened significantly in recent months, and long-term bond yields have been a key driver of this tightening,” he said.
Mr. Powell pointed out: High growth, high deficits, the central bank’s decision to shrink its own security reserves and technical market factors could all be contributing factors.
“There are many candidate ideas, and many feel their ancestors have been vindicated,” Mr. Powell said.
He later added that a rise in market rates was “the bottom line”, “something we can see” and “at the margin, it could reduce the impetus to raise interest rates further”.
The war between Israel and Gaza – and accompanying geopolitical tensions – also add to uncertainty about the global outlook. While this will undermine confidence among businesses and consumers, it is too early to know how it will affect the economy.
“Geopolitical tensions are very high and pose important risks to global economic activity,” Mr. Powell said.
Mr. Stocks were buoyant when Powell spoke, with investors struggling to understand what his comments meant for the immediate outlook on interest rates. Higher interest rates can be bad news for stock values.
The S&P 500 ended the day down nearly 1 percent. The move came with further increases in key market interest rates, with the 10-year Treasury yield rising below 5 percent, a level not surpassed since 2007.
The central bank chief reiterated the central bank’s commitment to bring inflation under control even at a critical juncture. Consumer price increases have slowed significantly since the summer of 2022, when they reached 9 percent. But they stood at 3.7 percent as of last month, up from around 2 percent before the start of the coronavirus pandemic.
“Both uncertainties, old and new, complicate our task of balancing the risk of too much tightening against the risk of too little tightening of monetary policy,” Mr. Powell said. “Given the uncertainties and risks, and given how far we’ve come, the team is proceeding cautiously.”
Joe Rennison contributed reporting.