Federal Reserve Chairman Jerome Powell reiterated his view that higher rates, which are likely to remain elevated for an extended period, are necessary to bring inflation back to the central bank's preferred 2% target.
Speaking as part of a keynote address to the Fed's central-banking symposium at Jackson Hole, Wyo., Powell said further rate decisions will hinge on incoming data, but bringing down inflation still has a "long way to go" despite recent "welcome" improvements.
"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," Powell said.
"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," he added. "Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy."
U.S. stocks extended earlier gains following the release of the text of Powell's speech, with the S&P 500 marked 13 points higher on the session and the Dow Jones Industrial Average gained 180 points. The tech-focused Nasdaq was up 50 points.
Benchmark 10-year note yields were pegged 2 basis points higher at 4.241% while 2-year notes rose 6 basis points to changed hands at 5.084%. The dollar index, which tracks the greenback against a basket of six global currencies, was up 0.16% to 104.142.
Powell dismisses idea of inflation-target change
CME Group's FedWatch now indicates a 78.5% chance that the Fed will hold rates steady at its next meeting in September, with bets on a quarter-point increase in November rising to around 43.2%.
"Chair Powell’s comments highlighting the progress on one hand and work left to be done on the other in brining inflation back to 2% echoes our own sentiment," said Andrew Patterson, Vanguard Senior Economist. "We believe the Fed will remain vigilant and data dependent in determining whether rates sustained at current levels for a longer period of time or further rate rises will be needed."
"Our baseline is for the latter, another 1-3 hikes are possible over the next several months and into next year before leaving them on hold for some time and only cutting when broader macro conditions weaken, resulting in a shallow recession," he added.
Powell also poured cold water on suggestions that the Fed should consider altering its 2% inflation target, given changes in the global economy that suggest higher rates of consumer-price changes can be more easily sustained.
"Two percent is and will remain our inflation target," Powell insisted. "We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to that level over time."
"There is evidence that inflation has become more responsive to labor-market tightness than was the case in recent decades," Powell added. "These changing dynamics may or may not persist, and this uncertainty underscores the need for agile policymaking."
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