Fed Chairman’s remarks could offer clues about rate hike

0

The Federal Reserve is committed to bringing inflation back to its 2% target, which means interest rates will continue to rise, Federal Reserve Chairman Jerome Powell said in a speech at the conference. a conference on Friday. But to what extent will it depend more on incoming data, he said.

Since the last meeting of the Fed’s decision-making arm in July, the Fed has seen encouraging signs of slowing inflation. July’s consumer price index rose 8.5% annually, after a blistering 9.1% in June. And this morning, the Fed’s favorite gauge of inflation – the personal consumption expenditure price index – showed a year-over-year rise of 6.3% in July, from 6.8 % in June.

But Powell stressed that a month is not a trend and the labor market continues to be very strong. Higher interest rates, slower growth and looser labor market conditions would lower inflation.

“While the weaker inflation readings for July are welcome, the single-month improvement is well below what the Committee will need to see before we are confident inflation is coming down,” he said. -he declares.

Ahead of the September meeting, the Fed will receive another month of data. The consumer price index for August is due on September 13 and the monthly employment report on September 2.

Impact on your portfolio:The Fed is trying to stop inflation with big rate hikes. How it affects debt, stocks, savings

Will the Fed ever lower interest rates?

Probably not any time soon. The Fed hasn’t even moved the fed funds rate above its “neutral rate” yet, which it says needs to happen. June forecasts from Fed members showed the median federal funds rate to be just below 4% through the end of 2023, and it is currently only between 2.25% and 2.5%.

Moreover, once the federal funds rate reaches a level that the Fed deems sufficiently restrictive, “restoring price stability will likely require continued tight policy for some time,” Powell said.

“The historical record strongly cautions against premature policy easing,” he added.

When will the Fed stop raising rates?

All decisions will depend on incoming data and the outlook, but that’s likely not soon with inflation well above the Fed’s 2% target and a still extremely strong labor market.

“Restoring price stability will take time and will require using our tools forcefully to rebalance supply and demand,” he said.

He expects the federal funds rate to need to rise above its so-called neutral rate — when rates are neither very restrictive nor too loose to fuel an overheated economy — to keep inflation under control. In the Fed’s latest economic projections in June, it saw the long-term federal funds rate at 2.5%. The federal funds rate range is currently between 2.25% and 2.5%.

But “at some point, as the monetary policy stance tightens further, it will likely become appropriate to slow the pace of increases,” he said.

–Medora Lee

Hawkish Fed sense

Powell’s speech took on a hawkish tone, meaning the Fed will continue to be hyper-focused on controlling inflation by ramping up rate hikes.

“While higher interest rates, slower growth and looser labor market conditions will reduce inflation, they will also hurt households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

Some hoped for a more dovish tone, in which Powell would likely have acknowledged that the pain rate hikes had hurt families and promised relief in the form of less aggressive rate hikes. But with inflation still near 40-year highs, Powell said he didn’t think it was appropriate to pull back now.

– Elisabeth Buchwald

Will the Fed get big again?

At the last July meeting of the Fed’s Policy Committee, the Fed raised its short-term federal funds rate by 75 basis points. It was the second mega rate hike in a row, and at the time Powell said another unusually large increase might be appropriate at its next meeting in September.

This morning, Powell said that “our decision at the September meeting will depend on the totality of incoming data and the evolution of the outlook,” Powell said.

But investors will note that consumer inflation may have slowed in July compared to June, but inflation is more widespread. Prices no longer rise only in certain parts of the economy. They occur in almost every industry, including rent, food, energy, and medical services.

In addition, the labor market remains extremely strong, with employers adding a solid 528,000 jobs last month. At the same time, wage growth has surged, meaning wages are likely to keep inflation high. Average hourly earnings jumped 0.5% for the month and 5.2% from a year ago.

–Medora Lee

Stock market reaction

After opening little change ahead of Powell’s speech, stocks turned negative as the Fed chairman failed to indicate that the central bank would forgo rate hikes anytime soon.

The Nasdaq Composite fell 241 points, or 1.8%. The S&P 500 fell 60 points, or 1.4%, while the Dow Jones Industrial Average fell 408 points, or 1.2% as of 10:50 a.m. EST.

Treasury yields rose, with the 10-year yield hovering at 3.046% and the 1-year at 3.361%.

– Elisabeth Buchwald

When is the next Federal Reserve meeting?

The policy arm of the Fed meets again on September 20-21 and announces its decision on interest rates at the end of the two-day meeting.

– Elisabeth Buchwald

What could prompt Powell to slow rate hikes?

Consumer inflation slowed to an annual rate of 8.5% in July from the breakneck pace of 9.1% in June. But since one month doesn’t trend, Powell can give himself some leeway to see what another month of data will show before the Fed’s policy arm reconvenes.

The August consumer price report is due on September 13 and the monthly employment report on September 2.

–Medora Lee

What could prompt Powell to stay the aggressive course?

Consumer inflation may have slowed in July compared to June, but inflation is more generalized. Prices no longer rise only in certain parts of the economy. They occur in almost every industry, including rent, food, energy, and medical services.

In addition, the labor market remains extremely strong, with employers adding a solid 528,000 jobs last month. At the same time, wage growth has surged, meaning wages are likely to keep inflation high. Average hourly earnings jumped 0.5% for the month and 5.2% from a year ago.

–Medora Lee

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and sign up for our free Daily Money newsletter for personal finance tips and business news Monday through Friday mornings.

Share.

About Author

Comments are closed.