Fed Chair Powell Calls Inflation ‘Very High’ and Warns ‘We Are Ready to Raise Interest Rates Further’

Federal Reserve Chairman Jerome Powell on Friday called for greater vigilance in the fight against inflation, warning that additional rate hikes may not be forthcoming yet.

Acknowledging the progress that has been made, the central bank chief said that inflation remains above the level policymakers feel comfortable with. He indicated that the Fed would remain flexible while it contemplates further moves, but gave little indication that it was ready to start easing anytime soon.

“Although inflation has come down from its peak — a welcome development — it is still very high,” Powell said in prepared remarks for his keynote address at the Fed’s annual Kansas City retreat in Jackson Hole, Wyoming. “We stand ready to raise interest rates further if appropriate, and intend to keep policy at a constrained level until we are confident that inflation is moving sustainably toward our target.”

The speech is similar to remarks Powell made last year in Jackson Hole, in which he warned that there could be “some pain” as the Fed continues its efforts to drag hyperinflation to its 2% target.

But inflation was running far ahead of its current pace at the time. Regardless, Powell indicated that it is too early to declare victory, even with data this summer largely in favor of the Fed. The months of June and July witnessed a decline in the pace of price increases.

“The lower monthly readings of core inflation in June and July were welcome, but two months of good data is only the beginning of what it will take to build confidence that inflation is moving sustainably lower towards our target,” he said.

Powell acknowledged that the risks are two-fold, with the risks of doing too much and too little.

“Doing too little may allow inflation to take hold above target and ultimately requires monetary policy to extract more persistent inflation from the economy at a high employment cost,” he said. “Doing too much may also cause unnecessary harm to the economy.”

“As is often the case, we are sailing by the stars under a cloudy sky,” he added.

Markets were choppy after the speech, with the Dow Jones Industrial Average off session highs and Treasury yields rising. The reaction contrasts with that of 2022, when stocks fell after Powell’s speech.

Powell’s remarks come on the heels of a series of 11 interest rate increases that have pushed the Fed’s key interest rate to a target range of 5.25% to 5.5%, the highest level in more than 22 years. In addition, the Fed slashed its balance sheet to its lowest level in more than two years, a process that has seen about $960 billion worth of bonds issued since June 2022.

Markets have recently been anticipating a slim chance of another rate hike at the September FOMC meeting, but are pointing to about a 50-50 chance of an eventual increase in the November session.

Powell did not provide a clear indication of how he thinks the decision will proceed.

“Given how far we’ve come, in future meetings we will be in a position to proceed carefully as we assess incoming data, evolving forecasts and risks,” he said.

However, he gave no indication that he was considering a rate cut.

“In future meetings, we will assess our progress on the basis of the aggregate data, projections and evolving risks,” Powell said. “Based on this assessment, we will tread carefully when deciding whether to further tighten monetary policy or, alternatively, to hold interest rates steady and await further data.”

He pointed to the dangers of strong economic growth in the face of widespread recession expectations.

Whereas last year’s speech was unusually short, this time Powell provided more detail about the factors that will go into the policymaking process.

Specifically, he broke down inflation into three major metrics and said the Fed is focusing more on core inflation, which excludes volatile food and energy prices. He also emphasized that the Fed closely tracks the PCE price index, which is a measure of the Commerce Department, rather than the Labor Department’s Consumer Price Index.

The three “broad components” he talked about include housing goods and services such as rental costs and non-residential services. He noted progress in the three areas, but said the non-residential sector is the most difficult to measure because it is the least sensitive to interest rate adjustments. This category includes things like health care, food services, and transportation.

“Twelve-month inflation in this sector has moved sideways since launch. However, the inflation measured over the past three and six months has declined, which is encouraging,” Powell said. “Given the size of this sector, further progress here will be necessary to restore price stability.”

In addition to the broader political outlook, Powell has refined some areas that are central to both market and political considerations.

Some lawmakers, especially on the Democratic side, have suggested that the Fed raise its inflation target to 2%, a move that would give it more policy flexibility and could prevent further rate hikes. But Powell rejected this idea, as he has in the past.

“2% is and will remain our inflation target,” he said.

In another issue, Powell has largely chosen to shy away from arguing about what is a long-term, natural, interest rate that is neither restrictive nor stimulating — the “R-Star” rate he spoke about at Jackson Hole in 2018.

“We see the current policy stance as constraining, putting downward pressure on economic activity, employment and inflation,” he said. “But we cannot say with certainty the neutral interest rate, so there is always uncertainty about the exact level of monetary policy constraint.”

Powell also noted that previous tightening steps likely have not made their way through the system yet, providing more caution about the future of policy.