Powell’s Grim Forecast: Brace for Higher Rates
Federal Reserve Chair Jerome Powell participated in a live interview at the Economic Club of Washington, DC on Monday afternoon, and with the central bank entering its blackout period at the end of the week ahead of the July meeting, market participants were eager for the chance to glean any last-minute indications about the path for monetary policy and a potential rate cut in September.
Powell began with a condemnation of the Saturday assassination attempt on Republican presidential candidate Donald Trump. “It was really a very sad day for our country,” he said. “Political violence has no place in our society, and I condemn it in the strongest terms. A man died at a political rally, two other people were critically injured. It's just a sad day, and I'm grateful that the injuries to the former president were not more serious. I'd rather not comment on the markets.”
Turning to the Fed’s core responsibilities, Powell reiterated his oft-repeated phrase that the Fed doesn’t think it would be appropriate to begin to loosen policy until they have greater confidence that inflation was moving sustainably down to 2% but acknowledged that they are encouraged by the recent progress, including last week’s CPI report.
“I would say we didn't gain any additional confidence in the first quarter, but the three readings in the second quarter, including the one from last week, do add somewhat to confidence,” he said. “We're a dual mandate bank; for a long time since inflation arrived, it's been appropriate to focus mainly on inflation, but now that inflation has come down and the labor market has indeed cooled off, we're going to be looking at both mandates. They're in much better balance, and that means that if we were to see an unexpected weakening in the labor market then that might also be a reason for reaction by us.”
Powell also resisted any attempts to get him to hint at the possible direction of monetary policy in the future. “I'm not going to be sending any signals one way or the other on any particular meeting, just to ruin the fun right at the beginning,” Powell added. “We're going to make these decisions meeting by meeting, and we're going to make them on the basis of the data as they come in, the evolving data, the evolving outlook, and also the balance of risks now that the two mandates are close to being in balance.
The Fed Chair pushed back against any suggestion that the central bank might be influenced by the sitting President or the election cycle. “We don't take political considerations into account,” Powell said. “We don't put up a political filter on our decisions. It's hard enough to make these decisions based on the appropriate factors. If you're going to add a whole different filter in an area where we're not experts, it's not going to improve the quality of our decisions and it's also not the orders we have from Congress. Our orders from Congress are to use our tools to foster maximum employment and price stability and to do so without political considerations. That's what we're always going to do. If you look at the modern record, that is what we do, and we don't think about election cycles or anything that's political.”
Powell also addressed the importance of confidentiality and trust at the Federal Reserve and said the absence of leaks was a point of pride for them. “I'm proud of that, actually,” he said. “We do take our obligations to confidentiality very, very seriously, because we know how consequential it would be for someone at the Fed to be leaking. Our whole success depends on having the public's confidence that we're ethical and that we're working on behalf of all Americans and not on behalf of ourselves and we're not leaking. When we're working on, for example, a regulatory matter or some matter involving one of the banks, it never leaks out of the Fed, so I am proud of that record.”
On inflation, Powell acknowledged that hindsight is 20/20, but said that “in foresight, I think that the work that we did in 2020 in response to the pandemic will stand up very well in history.”
He was also asked about the absence of the hard landing that was predicted by so many forecasters. “I have always felt like there was a pathway to getting inflation back down to our two percent goal on a sustainable basis without the kind of pain in the labor market, the kind of high unemployment, that has been typical of tightening cycles, and the reason why my colleagues and I thought that was that the labor market was so overheated that it could cool down quite a bit without having to,” Powell said. “There still is apparently no slack in the labor market. Essentially, you're at equilibrium now.”
Powell also discussed the degree to which the Fed funds rate was restrictive and where the neutral rate may end up. “I look at where we are now, our funds rate is 5.3%, give or take, and it feels like it's restrictive but not severely restrictive,” he said. “It tells me that the neutral rate must have risen, probably has risen, from where it was during the inter-crisis period.”
“I think instinctively – I can't prove this, we're going to learn about this empirically – but it seems to me that the neutral rate is probably higher than it was during the intra-crisis period,” he added. “And so rates will be higher.”
This article originally appeared on Kitco.
