The Fed’s Powell says the inflation battle has not been won and further rate hikes are planned
WASHINGTON, Dec 14 (Reuters) – The Federal Reserve will continue to hike interest rates next year even as the economy heads for a possible recession, Fed Chair Jerome Powell said on Wednesday, arguing higher costs would be paid if the US Federal Reserve fails to get a firmer grip on inflation.
Recent signs of slowing inflation are yet to inspire confidence that the battle has been won, Powell told reporters after the Fed’s policy-setting committee raised its benchmark overnight rate by half a percentage point and forecast it to continue up would rise above 5% in 2023, a level not seen since a sharp economic downturn in 2007.
Those increases in the cost of borrowing would come despite an economy that Fed officials projected to continue into nearly the next year with a 0.5% annual growth rate and a nearly a full percentage point higher unemployment rate through the end of 2023 and well beyond The increase historically associated with a recession will have faltered.
“We’re not talking about that kind of recession, that kind of recession. We’re just making these projections,” Powell said at a news conference. “I wish there was a completely painless way to restore price stability. There isn’t, and that’s the best we can do.”
He described the slow economic growth hinted at by Fed officials for next year as still “modest.”
“I don’t think it would count as a recession… That’s positive growth,” the Fed chair said, although “it won’t feel like a boom.”
However, other aspects of the Fed’s forecasts, notably a rise in the unemployment rate to 4.6% from the current 3.7%, are consistent with an emerging downturn as the central bank keeps interest rates at “restrictive levels” for at least the remainder next two years.
Wednesday’s rate hike, unanimously approved by Fed policymakers and widely anticipated by financial markets, lifted the target federal funds rate to the 4.25% to 4.50% range, which officials expect to lift next a level between 5.00% and 5.25% will rise year.
If anything, the bias is higher: Seven out of 19 policymakers predict higher rates are still needed, and US central bankers agree that risks are more towards higher-than-expected inflation than a surprise in the other direction are.
Still, Powell said, reiterating the hard line on enforcing the Fed’s 2% inflation target that he developed throughout the year, “The biggest pain, the worst pain, would come from us if we didn’t raise rates high enough.” so that inflation can solidify.”
“The new economic projections imply an even higher pain threshold than before” for a Fed willing to tolerate the equivalent of about 1.6 million lost jobs, wrote Aneta Markowska, chief financial economist at Jefferies. “This indicates that hawks are still clearly superior to doves.”
[1/3] Jerome Powell, Chairman of the Federal Reserve Board, speaks during a news conference following the announcement that the Federal Reserve has hiked interest rates by half a percentage point, at the Federal Reserve Building in Washington, U.S. December 14, 2022. REUTERS/Evelyn Hockstein
Even with recent improvements, the Fed’s preferred measure of inflation remains about three times the central bank’s target, and policymakers are forecasting it will take at least three years to fully return.
Only two out of 19 Fed officials expect the federal funds rate to stay below 5% next year, a sign of a still-broad consensus to resist inflation.
Wednesday’s Fed message also leaned on market expectations that recent data showing a slowdown in inflation could pull the central bank off its hawkish stance and prompt policymakers to cut rates before the end of next year.
“Getting markets to hear this is key to fixing financial conditions,” which have eased in recent months as inflation data has improved, a move counterproductive to the Fed’s anti-inflation strategy, he said Carl Riccadonna, Chief US Economist at BNP Paribas.
“LIMITING ENOUGH”
The new statement came after a policy meeting at which officials rolled back three-quarters of a percentage point on rate hikes announced at the previous four meetings.
US stocks closed lower on Wednesday. In the US Treasury market, which plays a key role in transmitting Fed policy decisions to the real economy, yields changed little to slightly lower. The dollar fell against a basket of currencies.
“Taken together, today’s statement and economic forecasts tell a simple but compelling story: this Fed is not ready to pivot in any meaningful way until it sees sustained and conclusive evidence of a reversal in inflationary pressures,” said Karl Schamotta, chief markets strategist at Corpay .
Powell said the speed of future rate hikes is less critical now than it was earlier in the year, when the central bank “hanged ahead” of rate hikes to keep pace with rising prices.
“It’s not that important how fast we move,” he said, noting that the larger question facing policymakers is how to find an “appropriately restrictive” endpoint and determine how long it will last should stay there.
“Our focus right now is really on shifting our policy stance to one that’s tight enough to ensure inflation returns to our 2 percent target over time, rather than rate cuts,” Powell said .
“Inflation data received so far in October and November shows a welcome slowdown in the pace of inflation, but much more evidence is needed to boost confidence that inflation is on a sustained downward path,” Powell said.
Reporting by Howard Schneider and Ann Saphir; Additional reporting by Lindsay Dunsmuir, Michael S. Derby and Saqib Ahmed; Edited by Andrea Ricci and Paul Simao
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