Federal Reserve Chairman Jerome Powell leaves office after speaking at a news conference following the Federal Open Market Committee meeting of the Federal Reserve in Washington, DC, June 14, 2023.
Mandel Yan | AFP | Getty Images
Federal Reserve Chairman Jerome Powell confirmed on Wednesday that further rate hikes are likely ahead before more progress is made in reducing inflation.
A week after FOMC officials decided not to push rates higher for the first time in more than a year, the central bank leader said the move may be a brief respite rather than a sign the Fed is done raising rates.
“Nearly all FOMC participants expect further rate hikes to be appropriate before the end of the year,” Powell said in prepared remarks He will testify before the House Financial Services Committee. The speech was part of his semi-annual appearance on Capitol Hill to update lawmakers on the status of monetary policy.
After last week’s two-day Federal Open Market Committee meeting, officials said they expect rates to increase by a total of 0.5 percentage points by the end of 2023. That would mean two more hikes, assuming a 25 basis point hike. The Fed’s benchmark lending rate is currently fixed between 5% and 5.25%.
Powell noted that inflation has cooled but is “still well above” the Fed’s 2% target, saying the central bank has more work to do.
“Inflation has moderated since the middle of last year,” he said. “Nevertheless, inflationary pressures remain high, and there is still a long way to go before inflation falls back to 2 percent.”
Fed officials generally prefer to focus on “core” inflation, which excludes food and energy prices. According to the central bank’s preferred measure of prices for personal consumption expenditures, that suggests inflation was up 4.7% year-on-year through April. The core consumer price index came in at 5.3% in May.
Monetary policy moves, such as rate hikes and the Fed’s efforts to reduce bond holdings on its balance sheet, tend to have a lagged effect. As a result, officials decided not to raise rates at this month’s meeting after observing the impact of policy tightening on the economy.
Powell said the labor market remains tight despite signs that conditions are easing, such as an increase in labor force participation among the prime age group of 25 to 54 years old and a moderation in wages. However, he noted that the number of vacancies still far exceeds the available labor pool.
“We’ve been seeing the impact of our policy tightening on demand in the most rate-sensitive parts of the economy,” he said. “However, it will take time to achieve the full effects of monetary tightening, especially on inflation.”
Inflation expectations, considered a key variable in gauging the direction of prices over time, are “well anchored,” Powell said.closely watched University of Michigan Consumer Sentiment SurveyFor example, the outlook for inflation a year from now fell to 3.3%, the lowest level since March 2021.
However, Powell also noted that reducing inflation would require the economy to slow to below-trend growth. He also stressed that rate decisions would be made on the basis of data received and on a session-by-session basis, rather than on a pre-set route.
The remarks also briefly referenced the banking turmoil earlier this year. Powell said the incident was a reminder that the Fed needs to ensure its oversight is appropriate.