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Fed chair says inflation is still too high, more painful rate hikes could be coming

 August 27, 2023

Federal Reserve Chair Jerome Powell, in an address delivered on Friday, stressed the need for heightened scrutiny to tackle inflation. While recognizing advancements in the issue, he emphasized that inflation levels remain a concern.

Although there is no immediate sign of relaxation in the Fed's approach, the possibility of further interest rate increases still looms, as CNBC reported.

Persisting Inflationary Concerns

Powell, speaking at the Kansas City Fed's yearly gathering in Jackson Hole, Wyoming, commented, "Although inflation has moved down from its peak — a welcome development — it remains too high."

He added, "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."

In a reminiscent tone to his speech last year at the same event, Powell had cautioned about potential hardships in achieving the Fed's 2% inflation target.

But, comparing data from then and now, he warned against premature celebrations. The recent numbers, especially for June and July, indicate a deceleration in inflation, but Powell believes it's merely a start.

He addressed the challenging tightrope the Fed walks, saying, "Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment. Doing too much could also do unnecessary harm to the economy."

Market Responses and the Path Forward

The financial markets experienced fluctuations after Powell's speech, but both stocks and Treasury yields ended positively.

Reflecting on Powell's address, Ryan Detrick of the Carson Group remarked," "Was he hawkish? Yes. But given the jump in yields lately, he wasn't as hawkish as some had feared."

The Federal Reserve has seen its interest rate soar to between 5.25%-5.5%, a peak in over two decades, following 11 rate increases. The Fed's balance sheet has also slimmed to its leanest in over two years.

While Powell provided no definite direction, he did emphasize a careful approach, "Given how far we have come, at upcoming meetings, we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks."

He left little room for speculations on rate cuts. However, he hinted that economic growth might need to decelerate before any major shift in the Federal Reserve's stance.

Since the commencement of the rate hikes, the gross domestic product has consistently risen. According to the Atlanta Fed's records, the third quarter of 2023 is on track for a 5.9% growth rate. Moreover, employment remains robust, with unemployment rates matching the record lows of the late 1960s.

An Insight into Policymaking

In a more elaborate speech compared to last year, Powell offered deeper insights into the metrics the Federal Reserve considers. He spotlighted three primary inflationary factors, emphasizing the importance of core inflation, which eliminates the volatile components of food and energy prices.

He further categorized these factors into goods, housing services (like rents), and non-housing services, which encompass healthcare, food, and transport. Powell acknowledged progress in all segments but expressed that the non-housing sector, being less responsive to interest rate changes, demands more attention.

Unchanged Inflation Target

Powell also addressed some policy areas pivotal for both political and market perspectives. While some politicians, primarily from the Democratic camp, have proposed increasing the 2% inflation target for greater flexibility, Powell firmly dismissed any such amendments. "Two percent is and will remain our inflation target," he affirmed.

This stance drew critique from Jason Furman, a Harvard economist, who opined on X (previously Twitter), "Jay Powell said all the right things about near-term monetary policy, continuing to hope for the best while planning for the worst. But wish he had not ruled out shifting the target."