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United States Federal Reserve Chair Jerome H. Powell has said that inflation remains too high and the path toward sustainable reduction is uncertain despite a recent notable improvement in the inflation trajectory.
In a highly anticipated address at the Economic Club of New York Luncheon, Powell noted that after reaching a peak of 7.1 percent in June 2022, the 12-month headline Personal Consumption Expenditure (PCE) inflation has fallen to an estimated 3.5 percent through September. Core PCE inflation, which excludes volatile food and energy components, is also on a downward trajectory, estimated at 3.7 percent through September.
Regarding the labor market, Powell said strong job creation coupled with an increase in the supply of workers due to higher participation and immigration rebounding to pre-COVID pandemic levels. Various indicators suggest that the labor market is gradually cooling, with job openings and quits returning to pre-pandemic levels. Surveys of workers and employers also indicate a return to pre-pandemic levels of tightness. Powell noted that wage growth is showing a gradual decline, aligning with the goal of 2 percent inflation over time.
Powell acknowledged that the decline in inflation has not led to significantly higher unemployment, which is an unusual but welcome development. Economic growth has consistently exceeded expectations this year, with strong retail sales data being the latest evidence. However, he cautioned that achieving a sustainable return to the 2 percent inflation goal might require a period of below-trend growth and some further softening in labor market conditions. Powell also pointed out that elevated geopolitical tensions pose significant risks to global economic activity.
Regarding monetary policy, Chair Powell emphasized that the Federal Open Market Committee (FOMC) has tightened policy substantially over the past 18 months. They increased the federal funds rate by 525 basis points and decreased securities holdings by approximately $1 trillion, resulting in a restrictive policy stance. Powell stressed the FOMC's commitment to achieving a sufficiently restrictive policy to bring inflation down to 2 percent sustainably. Further tightening may be warranted if above-trend growth persists or if labor market tightness fails to ease.
The Fed Reserve chief acknowledged that changes in the stance of monetary policy affect broader financial conditions, which, in turn, impact economic activity, employment, and inflation. He highlighted that financial conditions have tightened significantly in recent months, with longer-term bond yields playing a crucial role. Powell emphasized the FOMC's attentiveness to these developments, as persistent changes in financial conditions can influence the path of monetary policy.
Powell reiterated the FOMC's commitment to bringing inflation back to 2 percent over time. He acknowledged the range of uncertainties and risks associated with their task, emphasizing the need to carefully balance the risks of tightening monetary policy too much or too little. The Committee will make future decisions based on incoming data, evolving economic outlook, and the balance of risks.
Meanwhile AP added: Powell said Thursday that inflation remains too high and that bringing it down to the Fed's target level will likely require a slower-growing economy and job market.
“A few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell said in remarks to the Economic Club of New York. “We cannot yet know how long these lower readings will persist or where inflation will settle over coming quarters.”
Last month, Fed officials predicted that they would impose one more interest rate hike before the end of the year, on top of a series of 11 rate increases that have lifted their key rate to about 5.4%, its highest level in 22 years. Economists and Wall Street traders expect the central bank to leave rates unchanged when it next meets in about two weeks.
A string of Fed officials have recently signaled that a rapid increase in longer-term interest rates, including the average 30-year fixed mortgage, which is nearing 8%, will likely cool the economy and help slow inflation. That would allow the Fed to stay on hold and observe how growth and inflation evolve in the coming months.
But several recent economic reports have suggested that the economy is growing robustly and that inflation could remain persistently elevated, which could require further Fed action.
“Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing," Powell said, “could put further progress on inflation at risk and could warrant further tightening of monetary policy.”