Federal Reserve Chair Jerome Powell cautioned that past interest-rate increases had yet to fully slow the economy, an argument for holding rates steady for now, even though stronger and sustained growth could require higher rates to keep inflation declining.
"Given how far we have come, at coming meetings we are in a position to proceed carefully," Powell said in a heavily anticipated address at the Kansas City Fed's annual symposium in Wyoming's Grand Teton National Park. "We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data."
Fed officials lifted their benchmark federal-funds rate last month by a quarter-percentage-point to a range between 5.25% and 5.5%, a 22-year high, continuing the most rapid series of increases in four decades. Their next meeting is Sept. 19-20.
Powell's speech illustrated how he is trying to thread the needle between slowing hiring, investment and spending to bring down inflation without providing so much restraint as to create a needlessly severe economic slowdown.
In June, most officials thought they would raise rates to a range between 5.5% and 5.75% this year, implying one more quarter-point increase later this year. Powell didn't tip his hand on whether the Fed would need to follow through on another rate increase, highlighting instead how coming economic data would inform that decision.
Inflation has slowed in the two months since officials made those projections, but economic activity has shown surprising strength.
Inflation has retreated from a 40-year high last summer, with the consumer-price index climbing 3.2% in July from a year earlier. That is well below the recent peak rate of 9.1% in June 2022.
Core prices, which exclude volatile food and energy categories, increased just 0.2% in both June and July, extending a broader slowdown in price pressures.
"Two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal," Powell said. "There is substantial further ground to cover."
Some officials are uneasy about raising rates further because they expect past increases will continue to slow the economy by making it more expensive and harder for companies and individuals to borrow. Others worry that if the Fed holds rates steady, strong economic growth could cause inflation to decline more slowly than anticipated.
Powell nodded to both concerns in his remarks. He said financial conditions, including lending standards and borrowing rates, have tightened broadly in a way that typically slows down economic activity, "and there is evidence of that in this cycle as well."
"But we are attentive to signs that the economy may not be cooling as expected," he said. Fed officials have been clear that they see inflation declining further because they expect the economy to grow below its long-run trend of around 2% over the coming year. "Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy," Powell said.
'FINGER ON THE TRIGGER'
Markets reacted by continuing to price in only a modest chance of a rate hike next month - less than 20%, based on rate futures pricing - but an increasing likelihood of a rate hike at one of the Fed's following two meetings - on Oct. 31-Nov. 1 and Dec. 12-13 - with prices indicating a better-than-50% chance of the policy rate ending the year in a 5.5%-5.75% range.
"My main takeaway is that when it comes to another rate hike, the chair still very much has his finger on the trigger, even if it's a bit less itchy than it was last year," said Inflation Insights' Omair Sharif.
It was difficult, Powell said, to know with precision the degree to which the Fed's current 5.25% to 5.5% benchmark interest rate had cleared the "neutral" rate of interest needed to slow the economy, and therefore hard to assess just where policy stands.
Powell repeated what has become a standard Fed diagnosis of inflation progress - with a pandemic-era jump in goods inflation easing and a decline in housing inflation "in the pipeline," but concern that continued consumer spending on a broad array of services and a tight labor market may make a return to 2% difficult.
Recent declines in measures of underlying inflation, stripped of food and energy prices, "were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably," Powell said.
"Given the size" of the broader services sector, excluding housing, "some further progress will be essential," the Fed chief said, and it will likely require an economic slowdown to deliver it.
"Restrictive monetary policy will likely play an increasingly important role. Getting inflation sustainably back down to 2% is expected to require a period of below-trend economic growth as well as some softening in labor market conditions," Powell said.
While Powell's tone was not as stern as last year, when in a very abrupt set of remarks he disabused market notions that the Fed was then nearing the end of its rate-hike cycle and would cut rates through this year. Still, it was clear he did not want to set aside any options.
“Powell continues to walk a tightrope," said Michael Arone, chief investment strategist at State Street Global Advisors. "This year I think he is demonstrating that he is pleased with how far monetary policy has come and how inflation has been reduced. But he is still holding on tightly to this notion that they are watching it carefully and they still have work to do.”
The Fed chair also indicated he is not open to entertaining a discussion about changing the Fed's 2% target for inflation as some economists have suggested may be warranted in an environment with growth that is persistently above trend.
"Two percent is and will remain our inflation target," Powell said. "We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to that level over time."
Powell ended his speech on Friday with nearly the same line he finished with last year at Jackson Hole: "We will keep at it until the job is done."
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