WASHINGTON (AP) — Federal Reserve Chairman Jerome Powell said Thursday that inflation remains too high and that cutting it to the Fed’s target level will likely require slower economic and labor market growth.

Powell noted that inflation has cooled significantly compared to last year. But he warned that the economy is growing faster than the Fed expected and inflation could remain high. Therefore, according to the Fed Chairman, it is not yet clear whether inflation is on a stable path back to the Fed’s 2 percent target.

“We certainly have a very resilient economy,” Powell said in a discussion at the Economic Club of New York. “Many forecasts assumed that the US economy would be in recession this year. Not only did that not happen; Growth this year is now above its longer-term trend. So that was a surprise.”

Powell’s comments echoed speeches from other Fed officials this week who have underscored that they are grappling with an unusual and unexpected development: Inflation is slowing, even as economic growth and hiring have been robust.

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In an effort to curb inflation, the Fed has raised its key interest rate 11 times since March 2022 to about 5.4 percent, the highest level in 22 years. Although inflation has fallen from its highs of last year, it still needs to go further to reach the Fed’s 2 percent inflation target. This will likely require slower economic growth.

If healthy economic growth and hiring continue, Powell said Thursday, the central bank may need to raise its key interest rate further. The Fed’s long series of interest rate hikes has increased the cost of auto and home loans, credit card loans and business loans, putting financial strain on many households and businesses.

At the same time, Powell noted that a rise in longer-term bond rates means the Fed may not need to raise rates again, at least not soon. The rise in long-term interest rates has helped push the average cost of a 30-year mortgage to nearly 8 percent. Higher long-term interest rates, in addition to the Fed’s short-term rate hikes, could help slow growth and cool inflation, reducing pressure on the Fed to raise rates further.

“That’s exactly what we want to achieve,” Powell said.

“On the sidelines,” he said, “it could mean that the Fed doesn’t have to raise rates any further.”

But Powell also said there was no evidence that interest rates are currently too high, a signal that he believes the Fed could raise them further without triggering a recession.

Asked about the economy’s resilience despite interest rate hikes, Powell said Thursday that interest rates simply “haven’t been high enough for long enough.” Many economists expect the Fed to keep interest rates high for an extended period of time, even if it doesn’t raise its key interest rate again.

Last month, Fed officials predicted they would push through another rate hike before the end of the year. Economists and Wall Street traders expect the central bank to leave interest rates unchanged at its next meeting in about two weeks.

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Several recent economic reports suggest that the economy is still growing strongly and inflation could remain elevated.

There were far more hiring in September than expected and the unemployment rate remained near its half-century low. Strong hiring opportunities typically empower workers to demand higher wages, which in turn can worsen inflation if their employers pass on higher labor costs through price increases.

But so far, wage growth has slowed, Powell noted. Other labor market metrics are also cooling, a trend that could keep inflation under control. Indeed, despite solid economic growth, inflation has largely slowed: The Fed’s preferred measure of price changes fell to 3.5 percent in September compared to 12 months earlier, a sharp decline from the annual peak of 7 percent in June 2022.

On Wednesday, Christopher Waller, an influential Fed board member, pointed out that the slowing inflation, even as the economy remained healthy, was “great news” but also “a little too good to be true.” “. He noted that growth could either slow, helping to cool inflation, or remain strong, leading to higher inflation and requiring further interest rate hikes by the Fed to contain it.

“It’s too early to tell,” Waller said. “I think we can wait and see how the economy performs before taking any final steps.”

Source : www.pbs.org

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