More important, however, will be how far rates will rise further next year and how long they will need to be kept high enough to reduce inflation and synchronize the labor market with the needs of the economy in the sense of wide.
“Restoring price stability is likely to require keeping policy tight for some time,” Powell said. “History strongly warns against premature policy easing. We will stay the course until the job is done.
The remarks come as financial markets seem concerned about any signs that the Fed is ready to ease its historic rate hike campaign. Markets were choppy early Wednesday afternoon as investors awaited Powell’s speech, but quickly turned green after Powell’s speech.
Powell said the The Fed’s inflation fight will inflict pain on households and businesses. But a much-dreaded recession has yet to arrive, and the main pillars of the economy remain remarkably resilient at higher rates. The widely held expectation is that the economy will slow significantly next year and that inflation provided great uncertainty in all sectors. But there is no precedent for the post-pandemic economic, and Powell’s job is to provide insight into his thinking while acknowledging how daunting the outlook remains.
“The truth is that the way forward for inflation remains very uncertain,” Powell said.
For the Fed to win its fight against inflation, Powell said output bottlenecks must continue to reduce, although he acknowledged they were already on track. Inflation on new leases – a crucial indicator of the housing market – must continue to fall next year. And the labor market needs to cool, with wages falling to more sustainable levels.
“Despite some promising developments, we still have a long way to go to restore price stability,” Powell said.
Powell placed particular emphasis on the labor market, which has been transformed by the pandemic in ways economists are still struggling to understand. The number of job openings far outweighs the number of people looking for work, and Powell said the labor supply gap “seems unlikely to be fully filled any time soon. “. The Fed can’t get more people back into the workforce, so its goal is to get borrowing costs high enough for businesses to forgo hiring and investing, dampening demand for new workers. .
But Powell said it would also be helpful if other policymakers — he didn’t name any, but the task could fall to Congress or the Biden administration — help find ways to add workers to the workforce. labor force while the Fed focuses on labor demand.
“I will say that policies to support labor market participation could, over time, provide benefits to workers joining the labor force and support overall economic growth,” Powell said, noting that he was not advocating no specific policy. “In the short term, a moderation in the growth of labor demand will be necessary to restore equilibrium in the labor market.”
Many other Fed officials — including board members and regional bank presidents — have weighed in on the economy and the way forward in recent weeks, particularly after an inflation report of October is much better than expected. But Powell has not spoken publicly since the The Fed’s last policy meeting in early November, when it warned it had become “harder to see the way” to avoid a recession. Some Fed watchers think Powell’s speech on Wednesday aimed to reassure markets that while the Fed will slow its hikes, it has yet to regain control of inflation, which remains near 40-year highs despite signs of easing and affects nearly every aspect of Americans’ daily lives.
Powell is not expected to speak publicly again until the Fed’s final policy meeting of the year in mid-December. Remarks on Wednesday, then, aiming to cement Wall Street and general public expectations of what is yet to come. The Fed has enormous power in interest rate policy. But the central bank also relies heavily on messaging and communication — and the president’s ability to guide the markets on what the Fed is doing.
It’s hard work at all times, and especially when the economy is as mysterious as it is today. To fill in the gaps, officials will take a close look at economic data released this week. On Wednesday, a new government report showed the number of job vacancies fell in October, an encouraging sign for officials looking for signs that the the labor market could slow down. New inflation data covering October is released on Thursday and the November jobs report is released on Friday.
Still, these snapshots are unlikely to alter the Fed’s likely plans to raise rates by half a percentage point in two weeks, marking the seventh rate hike in a historic year.
The central bank has raised rates by three-quarters of a percentage point in each of its past four meetings, moving at the most aggressive pace in decades. Since March, the Fed has raised its key rate from near zero to between 3.75 and 4%, and expectations are growing among Fed watchers and economists that rates could eclipse 5% next year. When officials gather in two weeks for their last meeting of the year, they will compile new economic projections showing that rates are likely to stay higher for longer than expected – and that any rate cut is still good going forward.
This approach is difficult to master. The Fed doesn’t want to signal that smaller hikes mean officials see enough progress on inflation. And similarly, the Fed doesn’t want markets or Wall Street analysts to misinterpret a possible pause in rate hikes. The hikes work with a lag, and it will take months for the full weight of the Fed’s decisions to ripple through the economy. At some point in 2023, the Fed’s focus will shift from raising rates to keeping it high enough and continuing to slow the economy – ideally, without contracting completely.
Speaking to reporters earlier this month, Boston Fed President Susan Collins said she took issue with the word “pause” to describe what would happen if the central bank stopped raising rates, as it might have misleading associations.
“Getting rates to a tight enough level and keeping them there is a matter of resolution, because it impacts the economy,” Collins said. “For me, it’s not a ‘break’.”
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