BackUS Federal Reserve 'prepared to raise rates further' to bring inflation down to 2%: Jerome Powell at Jackson Hole
Powell said Fed policymakers would ‘proceed carefully as we decide whether to tighten further,’ but also made clear that the central bank has not yet concluded that its benchmark interest rate is high enough to be sure that inflation returns to the 2 per cent target.
PremiumThe US Federal Reserve is prepared to raise interest rates higher, and hold them there, in order to bring down elevated inflation in the world's largest economy, chairman Jerome Powell said at the Jackson Hole central banking conference in Wyoming.
“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective," said Powell.
Powell said Fed policymakers would "proceed carefully as we decide whether to tighten further," but also made clear that the central bank has not yet concluded that its benchmark interest rate is high enough to be sure that inflation returns to the 2 per cent target.
‘’It is the Fed’s job to bring inflation down to our 2 per cent goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak—a welcome development—it remains too high,'' added Powell.
On a 12-month basis, the US total, or ‘headline,’ PCE (personal consumption expenditures) inflation peaked at 7 per cent in June 2022 and declined to 3.3 percent as of July, following a trajectory roughly in line with global trend.
On a 12-month basis, the core PCE inflation peaked at 5.4 per cent in February 2022 and declined gradually to 4.3 per cent in July. ‘’The lower monthly readings for core inflation in June and July 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 toward our goal,'' said the Fed Chair.
‘’We can’t yet know the extent to which these lower readings will continue or where underlying inflation will settle over coming quarters. Twelve-month core inflation is still elevated, and there is substantial further ground to cover to get back to price stability,'' added Powell.
Following a pause on rate hikes in June, Jerome Powell-led Federal Reserve raised its benchmark lending rate on Wednesday to the highest level since 2001 to tackle above-target inflation, and signaled the possibility of further increases ahead.
The quarter percentage-point rise lifts the Fed's key lending rate to a range between 5.25 per cent and 5.5 per cent, said the rate-setting Federal Open Market Committee (FOMC).
FOMC members voted unanimously to hike the overnight interest rate to 22-year high to bring inflation down to the 2 per cent target. The central bank added that it will "continue to assess additional information and its implications for monetary policy."
US Policymakers enter ‘new phase’
Policymakers in US are entering a new phase of their campaign to bring inflation back to the 2 per cent target. After an aggressive interest-rate hike cycle in 2022, Powell and his ministers have slowed the pace this year, and indicated they may be close to wrapping up rate hikes.
Powell signaled that the policy has shifted to a more deliberative phase where risk-management is now “critical." He noted the economy may not be cooling as fast as expected, saying recent readings on economic output and consumer spending have been strong.
The US economy grew at a 2.4 per cent annualized pace in the second quarter, a surprisingly robust reading that prompted several economists to boost forecasts for the third quarter and reconsider odds of a recession.
On the outlook, further unwinding of pandemic-related distortions should continue to put some downward pressure on inflation, restrictive monetary policy will likely play an increasingly important role, according to Powell.
Getting inflation sustainably back down to 2 per cent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions.
Powell added that at the upcoming meeting, the US central bank will assess the progress based on the totality of the data and the evolving outlook and risks. Based on the assessment, Fed will decide whether to tighten further or hold the policy rate constant and await further data.
The comments are consistent with expectations that the Fed will leave interest rates unchanged at the September 19-20 meeting, with the possibility of a hike later in the year.
India Impact
“The Federal Reserve (Fed) has maintained a hawkish tone, signaling that it is committed to raising interest rates in order to combat inflation. As interest rates rise, FPIs may become more cautious about investing in riskier assets such as Indian stocks. However, the Indian market has been resilient in recent weeks with strong DII and retail participation offsetting the sell-offs by FPIs," said Trivesh D, COO, Tradejini.
“Even if the Fed does not raise interest rates further, it may still feel compelled to keep its benchmark rate elevated in order to contain inflation which could lead to a credit crunch and a sharp slowdown in economic growth. Investors should carefully monitor the situation and adjust their portfolios for companies which are fundamentally stronger in the domestic market with controllable exposure to the foreign markets."
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