Robust growth in the US economy may necessitate additional rate hikes to ease inflationary pressures, said Federal Reserve Chairman Jerome Powell.
Speaking at the Jackson Hole Economic Symposium, an annual conference of central bankers in Jackson Hole, Wyo, Powell outlined the uncertainties surrounding the economic outlook while pointing out the possible need for further restrictive monetary policy, as reported by the Associated Press. .
Inflation is still too high
Despite inflation falling from its peak, Powell insists it remains excessively high. He further emphasized that the Federal Reserve remains alert to signs that the economy is not slowing as predicted. The central bank is poised to raise interest rates further if necessary and intends to maintain a restrictive policy level until it sees substantial evidence of a sustained fall in inflation towards their target of 2%.
As Powell noted, the economy has been growing at an unexpected rate, coupled with consistent consumer spending, potentially perpetuating high inflationary pressures. This observation marks a significant departure from his statements made the previous year, in which he explicitly warned of continued sharp rate hikes by the Fed to curb rising prices.
The Fed’s interest rate hikes have resulted in significantly higher interest rates on loans, making it challenging for Americans to afford homes or cars and for businesses to fund expansions. Despite this – and contrary expectations – the US unemployment rate remained stable at 3.5%, barely above its half-century low. Continued inflation and robust employment data underline Powell’s concerns about rapid economic growth, pointing to a potential need for higher interest rates as a constraint.
Contrary to expectations earlier this year, most traders now do not foresee rate cuts before mid-2024. According to Powell, central bank policymakers believe their policy rates are high enough to contain the economy and support growth, employment and to cool inflation. However, he acknowledged the difficulty in determining the necessary borrowing costs to slow the economy, which resulted in continued uncertainty about the effectiveness of the Fed’s policy in reducing inflation.
While traders and economists have shown increasing optimism about a “soft landing” – the Fed has met its inflation target without triggering a steep recession – others remain sceptical.