Affirming that the current halt to interest rate hikes is very likely just a pause, Federal Reserve Chair Jerome Powell appeared before Congress and reiterated that more rate hikes are likely in the near term.
Powell’s comments come exactly a week after the Federal Open Market Committee’s last meeting, in which its members opted not to raise the central bank’s benchmark interest rate for the first time in 14 months. Presenting the Fed’s semiannual Monetary Policy Report to the House Financial Services Committee, Powell said that May’s decision against another rate increase doesn’t necessarily telegraph policy moving forward.
He acknowledged the hardships that the Fed’s proactive policy has had on rate-sensitive parts of the economy, such as the real estate market. Powell also noted that “uncertain lags” between monetary policy decisions and their impacts on the economy made it prudent to pause rate hikes for the time being. But as it relates to reining in inflation, he averred that while inflation has eased, the job remains unfinished.
“We at the Fed remain squarely focused on our dual mandate to promote maximum employment and stable prices for the American people,” Powell said in his introductory remarks. “My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal. Price stability is the responsibility of the Federal Reserve, and without it, the economy does not work for anyone.”
He added that “reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions” but that bringing prices back to a stable range is necessary to maximize economic fundamentals in the long haul.
Financial projections released after the Federal Reserve’s meeting last week already implied a return to more hawkish policy later in the year. Fed policymakers offered a median projection of an additional 50 basis points to the anchor rate before the close of 2023 — the equivalent of two more rate increases if the Fed moves in increments of one-quarter percentage point. Also, nine of the 18 policymakers contributing to the projections predicted two more increases this year, while Powell told Congress that “nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year.”
Powell did say that while the Fed felt it was important to be aggressive in the early goings of the inflation fight, such urgency isn’t as critical now. But his statements to the House clarified that any hopeful expectations of an extended reprieve from rate increases should be subdued.
“Chairman Powell made clear today that the pause at this month’s meeting was most likely temporary,” said Marty Green, principal at San Antonio-based mortgage law firm Polunsky Beitel Green. “Inflation concerns continue to be at the forefront. One benefit in telegraphing a potential increase in rates at future meetings is that it dampens or eliminates the hope of possible decreases in the fed funds rate for the remainder of 2023, which some market participants continued to harbor.
“While the Fed may be somewhat patient in assessing incoming data, Chairman Powell made clear the Fed will not be complacent in the inflation fight and is prepared to make one or two further hikes if necessary to get inflation more under control.”