Powell, who was speaking Friday at the Federal Reserve Bank of Kansas City’s annual Jackson Hole conference in Wyoming, said the Fed would “proceed carefully” as it decided whether to make further policy adjustments after a year and a half in which it had pushed interest rates up sharply.
But even as Powell emphasized that the Fed was trying to balance the risk of doing too much and hurting the economy more than is necessary against the risk of doing too little, he was careful not to take a victory lap around a recent slowing in inflation. His speech hammered home one main point: Officials want to see more progress to convince them that they are truly bringing price increases under control.
“The message is the same: It is the Fed’s job to bring inflation down to our 2% goal, and we will do so,” Powell said, comparing his speech to a stern set of remarks he delivered at last year’s Jackson Hole gathering.
Central bankers have lifted interest rates to a range of 5.25% to 5.5%, up from near-zero as recently as March 2022, in a bid to cool the economy and wrestle inflation lower. They have been keeping the door open to the possibility of one more rate increase and have been clear that they expect to leave interest rates elevated for some time. Powell kept that message alive Friday.
“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,” he said.
But the Fed chair noted that “at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” and that officials would “decide whether to tighten further or, instead, to hold the policy rate constant and await further data.” That suggests that central bankers are not determined to raise interest rates at their upcoming meeting in September. Instead, they might wait until later in the year – they have meetings in November and December – before making a decision about whether borrowing costs need to climb further. Striking a patient stance would give officials more time to assess how the moves they have already made are affecting the economy.
“I think this does pave the way for a pause at the September meeting and leaves their options open after,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “We’re close to the top, we may be there, and they’re going to move carefully.”
Powell made clear that the Fed was not in a rush to raise rates again, but he remained cautious about the risk of further inflation.
Price increases have come down notably in recent months, to around 3% as measured by the Fed’s preferred gauge. That is still higher than the Fed’s 2% inflation goal, though it is down sharply from a 7% peak last summer.
And there are signs of stubbornness lingering under the surface. After stripping out food and fuel for a look at the underlying trend, the central bank’s preferred inflation gauge is still running at about twice the Fed’s goal.
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“The process still has a long way to go, even with the more favorable recent readings,” Powell said. “We can’t yet know the extent to which these lower readings will continue or where underlying inflation will settle over coming quarters.”
That is partly because the Fed is trying to assess how much its policy adjustments are really weighing on the economy and, through it, inflation.
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The Fed’s higher borrowing costs have been cutting into demand for cars and houses by making auto loans and mortgages more expensive, and they are probably discouraging business expansions and cooling the job market.
But it is unclear just how severely the Fed’s current policy setting is weighing on the economy. Rates are much higher than the level that most economists think is necessary to keep the economy growing below its potential run rate, but such estimates are subject to error.
“There is always uncertainty about the precise level of monetary policy restraint,” Powell acknowledged Friday.
That is particularly relevant in the face of recent economic data, which has been surprisingly strong. Consumers continue to spend and companies continue to hire at a solid clip in the face of the Fed’s onslaught. The resilience has caused some economists to warn that there is a risk that the economy could speed back up, keeping inflation elevated.
“We are attentive to signs that the economy may not be cooling as expected,” Powell said. “Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
Still, Powell also emphasized that the economy could be taking time to react to the policy moves already made and that conditions are unusual in the wake of the pandemic: For instance, job openings have fallen by an unusual amount without pushing up unemployment.
“This uncertainty underscores the need for agile policymaking,” he said.
Powell’s counterpart, Christine Lagarde, who heads the European Central Bank, made a similar point about policy in the euro economy and globally during a separate speech at the Jackson Hole conference – though the uncertainties she emphasized were more long term.
She underlined that the economy is changing fundamentally as labor shortages span many markets, technologies like artificial intelligence develop, and countries shift away from fossil fuels and toward green energy. And she said that in a changing world, overreliance on models and past data – or expressing too much confidence – would be a mistake.
“There is no preexisting playbook for the situation we are facing today – and so our task is to draw up a new one,” she said. “Policymaking in an age of shifts and breaks requires an open mind and a willingness to adjust our analytical frameworks in real time to new developments.”
But Lagarde emphasized that it was critical to remain committed to achieving price stability, at the central bank’s current 2% inflation target, even in an uncertain world.
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Powell seemed to agree. During his own speech, he shot down a growing round of speculation among economists that the Fed could – or should – raise its inflation goal, which would make it easier to hit.
“Two percent is and will remain our inflation target,” he said.
And he finished the talk with the same line that he used to conclude his speech at last year’s Jackson Hole gathering, which was roundly seen as an aggressive stance against inflation.
“We will keep at it until the job is done,” he said.
