Economy, Americas

US inflation remains too high, Fed prepared to raise rates further: Chair Powell

'We intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down,' says Jerome Powell

Ovunc Kutlu  | 25.08.2023 - Update : 26.08.2023
US inflation remains too high, Fed prepared to raise rates further: Chair Powell


US Federal Reserve Chair Jerome Powell on Friday said inflation remains too high and the central bank is prepared to raise interest rates further.

"We intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down to our objective," he said in his speech at the annual three-day Jackson Hole symposium in the US state of Wyoming.

"In the upcoming meetings, we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks," he added.

Powell said high inflation is a result of "very strong demand" and "pandemic-constraint" supply.

"Process of bringing down inflation still has "a long way to go" even with the more favorable recent macroeconomic reading," he said.

The Fed, since March 2022, has undertaken one of the most aggressive monetary tightening in history to fight record inflation, which soared to a four-decade high of 9.1% in June 2022.

The bank raised interest rates by a total of 425 points in seven hikes last year, which were followed by 25 basis points apiece on Feb. 1, March 22, May 3, and most recently July 26.

Powell noted that core PCE inflation peaked at 5.4% in February on a 12-month basis and declined gradually to 4.3% in July this year.

Although the core inflation monthly reading in June and July were welcomed, "two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably" towards the Fed's goal of 2%, according to the Fed chair.

"We can't yet know the extent to which these lower reading will continue, where the underlying inflation will settle over the coming quarters. The 12-month inflation is still elevated and there is substantial further ground to cover to get back to price stability," he explained.

The chair said prices for goods, housing services and all other services are the main contributors to high core PCE inflation.

Although the core inflation for durable goods has fallen sharply, especially in the last two months, he stressed that on a 12-month basis core goods inflation remains well above its pre-pandemic level.

"Sustained progress is needed and restrictive monetary policy is called for to achieve that progress," he added.

Powell said the effects of Fed's monetary policy became more apparent in the US housing sector, as mortgage rates doubled over the course of last year, causing housing starts and sales to fall and house price growth to plummet.

"Because leases turn over slowly, it takes time for a decline in market rent growth to work its way into the overall inflation measure. The market rent slowdown has only recently begun to show through that measure," he added.

The chair emphasized that if market rent growth settles to pre-pandemic levels, housing services inflation should decline toward its pre-pandemic level as well, and noted that the Fed will continue to watch the market rent data closely.

Powell said the 12-month inflation for the final category of all other services, such as health care, food, transportation and accommodation, has moved sideways, but argued it is encouraging that their inflation measure over the past three to six months has declined, since they are less affected by global supply chain bottlenecks.

"Production of these services are also relatively labor intensive and the labor market is tight. Given the size of this sector, some further progress is essential in restoring price stability. Over time, restrictive monetary policy will help bring aggregate supply and demand back into better balance, reducing inflationary pressures in these key sectors," he explained.

Powell said the Fed's restrictive monetary policy to bring inflation down sustainably to 2% is "expected to require a below trend economic growth and some softening in labor market conditions."

He said the Fed's restrictive policy has tightened financial conditions, adding that bank lending standards have tightened and loan growth has slowed sharply.

"Growth in industrial production has slowed and amount spent on residential investment has declined in each of the past five quarters," he noted. "But, we are attentive to signs that economy may not be cooling as expected. So far this year, GDP growth come in above expectations and above its longer-run trend. And, recent readings in consumer spending have been especially robust."

Powell underlined that additional macroeconomic evidence of persistently above-trend growth "could put further progress on inflation at risk and could warrant further tightening of monetary policy."

He said rebalancing of the labor market has continued over the past year but remains incomplete, while labor supply has improved and the labor force participation rate of women in their prime working years reached an all-time high in June.

"Job openings remain high but are trending lower, payroll job growth has slowed significantly, total hours worked has been flat over the past six months, and the average work week has declined to the lower-end of its pre-pandemic range, reflecting a granularization to normal market conditions," Powell said.

Powell concluded by stressing that inflation has become more responsive to labor market tightness, as some uncertainties complicates the Fed's task of balancing its monetary policy of "tightening too much" against the "risk of tightening too little."

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