Federal Reserve Chairman Jerome H. Powell reiterated the central bank’s commitment to proceed “cautiously” with further rate changes in a speech Thursday. But he also said that if economic data continues to come in, the central bank may need to increase interest rates further.
Mr Powell tried to paint a balanced picture of the challenge facing the Fed in remarks before the Economic Club of New York. He emphasized that the Fed is trying to weigh two goals against each other: It wants to keep inflation completely under control, but it also wants to avoid doing too much and harming the economy unnecessarily. Wants.
Yet this is a complicated moment for the central bank because the economy is behaving surprisingly. Authorities have raised interest rates sharply from 5.25 to 5.5 percent over the past 19 months. Policymakers are now debating whether they need to raise rates once more in 2023.
Higher borrowing costs are believed to dampen economic activity – reducing home buying, business expansion and demand of all kinds – to cool inflation. But so far, growth has been unexpectedly resilient. consumers are spending, Companies are hiring. And while wage growth has been slowing, overall growth has been so strong that some economists have questioned whether the economy is slowing enough to get inflation back to the Fed’s 2 percent target.
“We are paying close attention to recent data showing economic growth and the resilience of labor demand,” Mr. Powell acknowledged Thursday. “Additional evidence of persistently upward-trending growth, or that labor market tightness is no longer easing, could jeopardize further inflation progress and require further tightening of monetary policy.”
Mr Powell called the recent growth data a “surprise” and said it came as consumer demand remained stronger than expected.
“It may be that rates have not been this high for a long time,” he said, later adding that “the evidence is not that policy is too tight right now.”
Economists interpreted his comments to mean that although the Fed is unlikely to raise interest rates at its upcoming meeting, which ends on Nov. 1, it is leaving the door open to a possible rate increase after that. The Fed’s final meeting of the year will end on December 13.
The Fed chairman had reasons to keep his options open. Although growth has been strong in recent data, there are reasons to think the economy may be set for a more pronounced recession.
Mr Powell said the Fed has already raised short-term interest rates too much, and these steps “could still happen” to slow the economy. And importantly, long-term interest rates have moved higher in the markets over the past two months, making it much more expensive to borrow money to buy a home or car.
Mr Powell said tough financial conditions could weigh on growth.
“Financial conditions have tightened significantly in recent months and long-term bond yields have been a significant driving factor in this tightening,” he said. “We are paying close attention to these developments as continued changes in financial conditions could have an impact on the path of monetary policy.”
Mr Powell pointed to several possible reasons behind the recent rise in long-term rates: higher growth, higher deficits, the Fed’s decision to reduce its security holdings and technical market factors could all be contributing factors.
“Many candidates have different views, and many feel that their predecessors have been confirmed,” Mr. Powell said.
He later said that “the main thing” was that a rise in market rates was “something we would look at” and that “at the margin, it could reduce the incentive for the Fed to raise interest rates further.” .
The war between Israel and Gaza – and the geopolitical tensions associated with it – also add to uncertainty about the global outlook. It is too early to know what effect this will have on the economy, although it could weaken confidence between businesses and consumers.
“Geopolitical tensions have escalated significantly and pose significant risks to global economic activity,” Mr Powell said.
Shares were volatile when Mr. Powell spoke, suggesting investors were struggling to understand what his comments meant for the immediate outlook on interest rates. Higher interest rates are bad news for stock prices.
The Fed Chairman reiterated the Fed’s commitment to getting inflation under control even at a complex moment. Consumer price increases have slowed significantly since the summer of 2022, when they reached around 9 percent. But they remained at 3.7 percent as of last month, still well above the roughly 2 percent level before the start of the coronavirus pandemic.
“A range of uncertainties, both old and new, complicate our task of balancing the risks of tightening monetary policy too much with the risks of tightening too little,” Mr Powell said. “Given the uncertainties and risks, and given how far we have come, the committee is proceeding with caution.”
Joe Rennison contributed reporting.