Powell Emphasizes Persistent High Inflation and Potential Need for Slower Economic Growth to Curb It

Federal Reserve Chairman Jerome Powell addressed the Economic Club of New York, acknowledging signs of cooling inflation but asserting the central bank’s commitment to its 2% mandate. Powell didn’t commit to a specific policy path but didn’t signal an imminent interest rate hike either. Market futures traders interpreted Powell’s speech as eliminating the possibility of a rate hike in November and reducing the likelihood of one in December. Powell acknowledged progress in reducing inflation but stressed vigilance, stating, “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 sustainably toward our goal.” Powell maintained that policy doesn’t feel too tight now but noted that “higher interest rates are difficult for everybody.” He emphasised the Fed’s commitment to sustaining inflation to 2%. Incoming data showed progress toward the Fed’s dual mandate goals of maximum employment and stable prices. Annual inflation rates have slowed to 3.7% from over 9% in June 2022. Protesters from the group Climate Defiance delayed the speech briefly. They held a sign reading “Fed is burning,” surrounded by the words “money, futures, and planet.”

Powell noted that a sustainable return to the 2% inflation goal might require a period of below-trend growth and some softening in labor market conditions. The Fed has raised interest rates 11 times since March 2022, taking the benchmark rate to its highest level in about 22 years. Powell stated, “We’re very far from the effective lower bound, and the economy is handling it just fine.” While recent job creation has been strong and layoffs slow, it could put inflation progress at risk. Powell said, “Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could warrant further tightening of monetary policy.” The market expects the Fed to hold off on additional rate hikes, but questions remain regarding when officials might start cutting rates. Powell was noncommittal on the future of policy, indicating that the Committee is proceeding carefully based on incoming data, the evolving outlook, and risk assessments.

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