Federal Reserve chair Jerome Powell on Wednesday said there isn't yet "clear progress" that decades-high inflation has turned a corner, despite rapid interest rate increases and slowing economic growth.
Why it matters: The assessment signals that the Fed will continue raising interest rates higher than its leaders expected, and will likely keep them high next year in its effort to tamp down inflation.
What they're saying: "It will take substantially more evidence to give comfort that inflation is actually declining." Powell said at an event hosted by the Brookings Institution.
- "By any standard, inflation remains much too high"
Catch up quick: The Fed has raised rates 6 times since March, with four of those increases by a historically large 0.75 percentage point. Fed officials have hinted at a downshift in the pace of rate hikes, in part to assess the lagged nature of their hikes so far on the economy. That slowdown could come "possibly as soon as the December meeting," Powell said.
- Powell also offered a similar message to the one he offered earlier this month, following the Fed's last policy decision: Although the rate increases will be of a smaller magnitude, it's likely rates will ultimately have to be higher than officials previously thought.
- "The timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level," Powell said.
- Speaking during a Q&A session after the speech, Powell said there is still a chance the economy averts a recession, though the odds have slimmed. "To the extent we need to keep rates higher longer, that's going to narrow the path to a soft landing," Powell said.
Zoom out: The Fed has walked a fine line in recent weeks, trying to signal that, while it will soon back off the ultra-aggressive pace of rate hikes, the battle against inflation is far from over. There is more ground to cover, Powell said.
- The labor market remains out of whack, Powell said, with demand for workers far exceeding the supply of available employees.
- Some of that is due to a smaller labor force that stems from a wave of pandemic-era retirements, which Powell said has shown little sign of reversing itself. Adding to the problem is slower growth in the working-age population.
- All of it is contributing to wages that — from the Fed's perspective — are rising at far too quick a pace.
Between the lines: October's softer-than-expected Consumer Price Index report showed signs of easing price pressures, stoking optimism that inflation had peaked. The Fed, though, isn't yet convinced: "Down months in the data have often been followed by renewed increases," Powell said.
- But the optimism showed up in financial markets after the CPI report: The S&P 500 is up over 10% from the low point in October. Yields on government bonds dropped notably from the high point of the prior month.
- That wasn't a welcome development for the Fed, and officials have tried to dampen the mood in recent weeks. Tightening financial conditions — lower stock prices, higher yields on government bonds, and a stronger U.S. dollar — is an important tool for the Fed to slow borrowing and spending in the economy.
- Stock prices climbed to the highest level of the day following Powell's speech, with the S&P 500 rising nearly 2%. The yield on the U.S. 10-year Treasury bond dipped slightly to 3.71%, holding well-below the high of 4.15% in October.
Editor's note: This story has been updated with additional reporting.
