Powell: More rate hikes may be needed

JACKSON HOLE, Wyoming — The continued strength of the U.S. economy could require further interest rate increases, Federal Reserve Chairman Jerome Powell said Friday in a closely watched speech that also highlighted the uncertain nature of the economic outlook.

Powell noted that the economy has been growing faster than expected and that consumers have kept spending briskly — trends that could keep inflation pressures high. He reiterated the Fed’s determination to keep its benchmark rate elevated until inflation is reduced to its 2% target.

“We are attentive to signs that the economy may not be cooling as expected,” Powell said. “We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

“Although inflation has moved down from its peak — a welcome development — it remains too high.”

Powell’s speech, at an annual conference of central bankers in Jackson Hole, Wyo., highlighted the uncertainties surrounding the economy and the complexity of the Fed’s response to it. It marked a contrast to his remarks here a year ago, when he bluntly warned that the Fed would continue its campaign of sharp rate hikes to rein in spiking prices.

“When it comes to another rate hike, the chair still very much has his finger on the trigger, even if it’s a bit less itchy than it was last year,” said Omair Sharif, chief economist at Inflation Insights.

Substantially higher loan rates, a direct result of the Fed’s rate hikes, have made it harder for Americans to afford a home or a car or for businesses to finance expansions. At the same time, items like rent, restaurant meals and other services are still getting costlier. “Core” inflation, which excludes volatile food and energy prices, has remained elevated despite the Fed’s streak of 11 rate hikes beginning in March 2022.

The overall economy has nevertheless powered ahead. Hiring has remained healthy, confounding economists who had forecast that the spike in rates would cause widespread layoffs and a recession. Consumer spending keeps growing at a healthy rate. And the U.S. unemployment rate stands exactly where it did when Powell spoke last year: 3.5%, barely above a half-century low.

“He is still very concerned how rapid the economy is growing because that does actually mean, all else equal, we need higher interest rates just to be restrictive,” said Diane Swonk, chief economist at KPMG.

In his speech, Powell did not mention the possibility that the Fed will eventually cut interest rates. Earlier this year, many on Wall Street had expected rate cuts by early next year. Now, most traders envision no interest rate cuts before mid-2024 at the earliest.

Powell said the central bank’s policymakers believe their key rate is high enough to restrain the economy and cool growth, hiring and inflation. But he acknowledged that it’s hard to know how high borrowing costs must be to slow the economy, “and thus there is always uncertainty” about how effectively the Fed’s policies are in reducing inflation.

The Fed’s officials “will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data,” he said.

Since Powell spoke at last summer’s Jackson Hole conference, the Fed has raised its benchmark rate to a 22-year high of 5.4%.