Hike rates

Powell: Fed could raise rates sharply in coming months to keep inflation under control

Powell acknowledged that the Fed’s continued tightening of credit will cause difficulties for many households and businesses, as its higher rates further slow the economy and potentially lead to job losses.

“These are the unfortunate costs of reducing inflation,” Powell said in the written version of a high-profile speech he delivers at the Fed’s annual economic symposium in Jackson Hole. “But a failure to restore price stability would mean far greater pain.”

Powell’s message could disappoint investors who were hoping for a signal that the Fed may soon moderate rate hikes later this year if inflation shows further signs of slowing.

After raising its short-term key rate by three-quarters of a point in each of its past two meetings — part of the Fed’s fastest rate-hike pace since the early 1980s — Powell said the Fed could pick up that pace “at some point”. – suggesting that such a slowdown is not near.

The Fed Chairman has made it clear that he expects rates to remain at levels that should slow the economy “for some time.”

THIS IS A BREAKING NEWS UPDATE. AP’s previous story follows below.

JACKSON HOLE, Wyoming (AP) — When Federal Reserve Chairman Jerome Powell delivers what will be his most scrutinized speech of the year on Friday, investors and economists will return his remarks for any clue as to how quickly the Fed could continue to raise its key interest rate — and for how long.

With inflation near a four-decade high — nearly 9% — Powell will likely point out that the Fed is determined to bring it back to its 2% target, come what may. Fed rate hikes may well defeat inflation in time. But there are fears they could cause a recession in the process.

Powell’s remarks will kick off the Fed’s annual economic symposium in Jackson Hole, the first time the central bankers’ conference has been held in person since 2019, after it went virtual for two years during the pandemic. of COVID-19.

Since March, the Fed has implemented its fastest pace of rate hikes in decades to fight inflation, which has punished households with soaring costs for food, gas, rent and other necessities. The central bank raised its policy rate by 2 percentage points in just four meetings, bringing it to a range of 2.25% to 2.5%.

These increases have led to higher costs for mortgages, auto loans and other consumer and business borrowing. Home sales have fallen since the Fed first announced it would raise borrowing costs.

Yet the central bank is at a crossroads. At a press conference after his last policy meeting in late July, Powell suggested that the Fed may decide to slow its rate hikes after imposing two consecutive three-quarter-point hikes – historically large moves – in June and July. .

He also said the Fed’s aggressive actions have raised its short-term key rate to a point where it is neither boosting nor slowing growth. Its benchmark rate had been kept close to zero from the start of the pandemic until March, as the Fed sought to bolster the economy.

Fed watchers are hoping Powell will send a signal on Friday about how big the rate hike announced by the central bank at its next meeting in late September or how long policymakers will keep rates high. They also hope to learn more about the factors policymakers will consider in the coming months when deciding when borrowing rates will be high enough.

“It has to sort of take into account the uncertainty around the outlook and try to explain what they will be looking for in making their policy decisions,” said William English, a professor at the Yale School of Management and former senior economist at the Fed.

How far, for example, must inflation fall before Powell and his colleagues suspend their rate hikes? What would the Fed do if unemployment, now at its lowest level in half a century, started to rise? If the economy were to tip into recession, many investors believe the Fed could pivot and cut rates again. But if inflation is not yet under control, this would be unlikely.

In June, Fed policymakers indicated that they expect their key rate to end 2022 in a range of 3.25% to 3.5%, then rise again next year between 3 .75% and 4%. If rates hit their projected level at the end of this year, they would be at their highest since 2008. Powell is betting he can conceive of a high-risk outcome: slowing the economy enough to ease inflationary pressures, but not to the point to trigger a recession.

Its task was complicated by the bleak picture in the economy: On Thursday, the government said the economy had contracted at an annual rate of 0.6% in the April-June period, the second quarter in a row of contraction. Yet employers are still hiring quickly and the number of people applying for unemployment assistance, a measure of layoffs, remains relatively low.

At the same time, inflation is still crushing, although it has shown some signs of easing, notably in the form of lower gasoline prices.

“The data is quite confusing,” said English. “It’s just hard to know what the exact situation is.”

At its July meeting, Fed policymakers voiced two competing concerns that shed light on their delicate task.

According to the minutes of that meeting, the officials – who are not identified by name – prioritized their fight against inflation. Still, some officials said there was a risk the Fed would raise borrowing costs more than necessary, risking a recession. If inflation moves closer to the Fed’s 2% target and the economy weakens further, these differing views could become difficult to reconcile.

After last month’s Fed meeting, Powell told reporters that the size of the next rate hike would “depend on what data we get by then.”

He also said that as rates rise, “it will likely become appropriate to slow the pace of increases” and assess how the Fed’s actions have affected the economy. These remarks helped spark a stock market rally as many investors interpreted them to mean the Fed. would be less aggressive in the coming months.

Since then, however, many Fed officials have pushed back against any notion that they were about to ease their fight against inflation.

Tom Barkin, president of the Federal Reserve Bank of Richmond, told CNBC this month: “I’d like to see a period of sustained inflation under control, and until we do, I think we’ll have to just keep moving rates higher.”

On Friday, Powell could also explain how the pandemic has caused a series of supply problems for the economy and what that could mean for Fed policy. COVID-19 shutdowns have led to shortages of semiconductors and other components as well as workers. Many of these supply shortages persist. And Russia’s invasion of Ukraine cut off supplies of oil and agricultural products, driving up global gas and food prices.

Such “supply shocks” pose a particular challenge to the Fed, as its policy tools consist of raising or lowering rates to stimulate or slow demand. Traditionally, the Fed ignores the impact of supply shocks on inflation assuming they will be temporary.

In fact, at last year’s Jackson Hole symposium, Powell listed five reasons why he thought inflation would be “transient.” Yet instead, she persisted.

As a result, some economists think Powell could play it safe this time and spend much of his speech discussing the economic outlook.

“Now is not the time to deploy a big executive,” said Vincent Reinhart, chief economist at Dreyfus and Mellon and a former Fed staffer. “They’re trying to figure out how to keep tightening up and doing something that the federal Reserve had nothing to do in 40 years.”

Powell should “repeat the facts, get the hell out of here,” Reinhart said.

This story was published from a news feed with no text edits. Only the title has been changed.

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