Global: Fed’s Powell- Potential Need for Higher Rates Balanced with Cautious Approach

Federal Reserve Chair Jerome Powell conveyed that the possibility of further interest rate hikes might be warranted to address lingering inflation concerns. In his statement on Friday, Powell assured that the Fed will navigate these decisions prudently during upcoming meetings, acknowledging both the strides achieved in curbing inflationary pressures and the challenges arising from the resilient U.S. economy.

Although not as assertive as his stance at the annual Jackson Hole Economic Policy Symposium a year ago, Powell’s comments were impactful. Investors now perceive an increased likelihood of an additional rate hike by the year’s end.

In his keynote address, Powell stated, “Our deliberation on whether to tighten policy further or maintain the policy rate while awaiting more data will be executed cautiously. The Fed remains dedicated to curbing inflation to meet our 2% target.”

Since March 2022, the Fed has augmented rates by 5.25 percentage points, leading to a decrease in the preferred gauge of inflation from its peak of 7% in the previous summer to 3.3%. While Powell appreciated this decline as a “positive development,” he underscored that inflation “persists at levels considered too high.”

He affirmed the Fed’s readiness to implement additional rate hikes as necessary and reaffirmed the commitment to maintain a restrictive policy stance until sustainable progress toward the inflation objective is observed.

However, Powell recognized signs suggesting the economy might not be cooling as projected. He highlighted robust consumer spending and a potential resurgence in the housing sector, indicating above-average growth. Such dynamics could jeopardize further inflation moderation, warranting potential monetary tightening.

Powell’s remarks reflect the Fed’s challenge in interpreting mixed signals from an economy where inflation’s decline hasn’t caused substantial economic costs. This phenomenon raises questions about whether Fed policy is adequately restrictive to achieve its goals.

Unlike last year’s speech that warned of forthcoming tightening, Powell avoided explicit references to potential “pain” for households from policy adjustments. He neither indicated proximity to rate cuts nor signaled immediate rate increases.

Futures contracts associated with the Fed policy rate suggest a probability of a September rate hike of just under 20%, with more than a 50% chance of the policy rate closing the year within a 5.5%-5.75% range, a quarter-point higher than the current interval. The yield on the two-year Treasury note reached its highest close since June 2007, ending the day at 5.08%.

Economists observed Powell’s cautious yet proactive approach. “Powell continues to walk a tightrope,” noted Michael Arone, Chief Investment Strategist at State Street Global Advisors. The Fed remains committed to its mission, with Powell concluding his address, “We will persist until the task is accomplished.”