JACKSON HOLE, Wyo. — There is more ground to cover to get inflation down to normal levels, and the Federal Reserve is resolved to keep a tight grip on the economy until it is confident the job is done, the central bank’s chief said Friday.
Federal Reserve Chair Jerome H. Powell left the door open for another rate hike in September, saying he and his colleagues will “proceed carefully” based on how the data unfolds, in his most important speech of the year during the Jackson Hole Economic Symposium. “We will need price stability to achieve a sustained period of strong labor market conditions that benefit all,” Powell said. “We will keep at it until the job is done.”
Powell highlighted the significant steps the central bank has already taken to hoist interest rates to the highest level in more than two decades, and the progress made on inflation over the past year. But he said there were still “signs that the economy may not be cooling as expected” and that plenty of uncertainty still hangs over this crucial fight. Financial markets bounced up and down slightly after his speech. Around noon, the Dow Jones Industrial Average was up 0.3 percent, and the Nasdaq was down 0.1 percent.
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In many ways, Powell echoed remarks he made last year, when he was unusually direct and used a brief Jackson Hole speech to underscore the message that the central bank would stabilize the economy at any cost. Then he warned that the pain of sharply rising interest rates was coming for households and businesses, an unfortunate but necessary cost of controlling inflation, which had soared to 40-year highs.
On Friday, Powell acknowledged that while much has changed since then, the mission remains the same. “The reference to last year was pointed and stark. The Fed is not resting on its laurels,” said Diane Swonk, chief economist at KPMG. “Last year was about the fire underway. This year was about the dry tinder that remains in the underbrush.”
After peaking at 9.1 percent last summer, inflation has come down significantly, with the consumer price index rising 3.2 percent in July compared with the previous year. That is still too high to satisfy the central bank. But there has been major progress as the Fed hikes rates, supply chains clear their backlogs and the energy shock from the initial Russian invasion of Ukraine fades.
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The job market has also defied expectations. The unemployment rate stood at a hot 3.5 percent in July. Employers are eager to hire, with about 1.6 job openings for each person looking for work. Layoffs have stayed relatively contained to sectors that bulged in the pandemic and then struggled to reset, such as technology, advertising and housing. And crucially, people are still spending, with shoppers doling out for restaurants, vacations, concert tickets and more. Many Americans are better off than before the pandemic, and there are few signs that consumers will suddenly tighten their belts.
Put together, the economic picture looks better than at any time over the past few years, although it is still a mixed bag. Powell noted that a key inflation measure has only shown a few months of progress, which is not enough to convince policymakers that the trend will continue. Economic growth has come in above expectations this year. And the housing market has already emerged from a brief downturn.
If the economy keeps churning more than policymakers expect, that could prompt more interest rate hikes or cause borrowing costs to stay higher for longer. Meanwhile, many Americans still feel the sting of high costs for the basics. And even as inflation eases, prices are not expected to return to levels before the pandemic.
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“We are in a strange situation,” said Adam Posen, president of the Peterson Institute for International Economics in Washington. “Every measure we have of U.S. economic performance, household balance sheets, household assets, unemployment rate, up and down the line, this is the best we have had it in 25 years, at least, and in some measures in decades. We have to recognize that is true. And that people just don’t see it.”
Share this articleShareThat is part of the reason Powell stopped short of declaring mission accomplished. Fed officials have long said that they will not let up prematurely, and that they could push even harder to snuff the remaining inflation out of the economy. Powell did not commit to a September hike, but he made clear that the Fed is “prepared to raise rates further if appropriate.”
“Powell pushed back on expectations that the Fed is ready to declare victory on its inflation fight, despite broad hints from the central bank it will pause in its rate hike campaign at its September meeting,” said Joe Brusuelas, chief economist at RSM. “Instead, Powell choose to double down on the ‘last mile’ of its inflation fight and reaffirm its commitment to its 2 percent target.”
For now, the benchmark interest rate for the Fed sits between 5.25 and 5.5 percent, the highest level in 22 years. Another quarter-point hike would mark the 13th rate increase in 18 months. Fed officials are not committed to hiking at back-to-back meetings, and they left rates unchanged when they convened in June. Such pacing could set the stage for officials to hike rates at later meetings in November or December, based on what they see on jobs, wages, inflation, economic growth and consumer spending.
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Susan Collins, president of the Federal Reserve Bank of Boston, noted that individual rate hikes are not the only way the central bank will stay resolute on inflation. Speaking to The Washington Post on Thursday, Collins said the Fed will need to keep rates high for a long period of time, rather than presume the job is done and cut rates too early.
Earlier phases of the Fed rate hike campaign were about speed, Collins said. Now, policymakers can take more time to see if their policies are sticking. “We are in a place where I think the work that we have done positions us to be able to be patient,” Collins said. “Taking longer, more holistic looks matters.” A reason policymakers are weighing whether to keep going is that rate hikes operate with a lag. Higher borrowing costs are designed to cool demand for all kinds of investments, from mortgage rates to auto loans.
But wild swings in the economy have made it difficult to model that timeline with much precision. The risk is that the Fed will press on before it fully understands how its moves affect households, businesses and the financial system. “Doing too little could allow above-target inflation to become entrenched,” Powell said. “Doing too much could also do unnecessary harm to the economy.”
Plenty is unknown. The topic of the Jackson Hole conference, a “who’s who” gathering of leading economists and policymakers, focuses on the global economy. Central bankers are watching economic tumult in China with some trepidation of spillover effects. Meanwhile, some economists are debating whether the Fed should raise its inflation target from 2 percent, a move some argue could protect the economy from future recessions. Powell, for his part, said “2 percent is and will remain our inflation target.”
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The main focus of the Fed right now is zapping the remaining sources of inflation. For months, rent has dominated as a key driver of price increases. There are signs that rent is finally cooling from pandemic highs. But a more meaningful drop is not expected until more homes come online later this year and next. Groceries are also up, with meat, fish, eggs and dairy products all pricier in July after two months of declines. That reality could answer why many Americans feel so bad about the economy or struggle to see progress in their daily lives.
Mary Daly, president of the San Francisco Fed, said there is a kind of exhaustion pulsing through the economy. In conversations across her district, which spans California and eight other Western states, Daly said she routinely hears from people who are financially scraping by. There is anxiety lingering for many households, after dealing with inflation or worrying about whether another recession is around the corner, she told The Post earlier this month.
Daly described one conversation with a worker who said her food bill was still two or three times what it was before the pandemic. But her paycheck was not two or three times what she used to earn. “That gap feels challenging to people,” Daly said. “There is no doubt things are better. But it is also clear we are not done yet.”
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