‘Fed to keep rates higher for longer’
WASHINGTON, D.C.: The Federal Reserve (Fed) will push rates higher than previously expected and keep them there for an extended period, Chairman Jerome Powell said on Wednesday in remarks likely intended to underscore the United States central bank’s single-minded focus on combating STUBBORN INFLATION.
Yet in a speech at the Brookings Institution, Powell also signaled that the Fed might increase its key interest rate by a half-point at its December meeting, a smaller boost after four straight threequarter point hikes. Rate increases could then fall to a more traditional quarter-point size at its February and March meetings, based on previous Fed forecasts.
Powell said the Fed was seeking to increase its benchmark rate by enough to slow the economy, hiring and wage growth, but not so much as to send the US into a recession.
It has lifted the rate six times this year to a range of 3.75 percent to 4 percent, the highest in 15 years.
Those increases have sharply boosted mortgage rates, causing home sales to plunge, while also raising costs for most other consumer and business loans.
“We think that slowing down at this point is a good way to balance the risks,” Powell said. “The time for moderating the pace of rate increases may come as soon as the December meeting,” which will take place on December 13 and 14.
Financial markets rallied in response to Powell’s suggestion that rate increases will slow. The S&P 500 jumped 122 points, or 3.1 percent. It had fallen before Powell spoke.
But he also stressed that smaller hikes shouldn’t be taken as a sign the Fed would let up on its inflation fight anytime soon.
“It is likely that restoring price stability will require holding [interest rates] at a restrictive level for some time,” Powell said. “History cautions strongly against prematurely loosening policy.”
The Fed chief acknowledged there has been some good news on the inflation front, with the cost of goods such as cars, furniture and appliances in retreat. He also said rents and other housing costs — which make up about a third of the consumer price index — were likely to decline next year.
But the cost of services, which includes dining out, traveling and health care, are still rising at a fast clip and is likely to be much harder to rein in, he added.
“Despite some promising developments, we have a long way to go in restoring price stability,” Powell said.
The Fed head singled out strong hiring and wage gains as the main driver keeping services costs high. Paychecks, on average, have jumped about 5 percent in the past year, before inflation, the fastest pace in four decades.
“We want wages to go up strongly, but they’ve got to go up at a level that is consistent with 2-percent inflation over time,” Powell said. Wage growth at about 3.5 percent a year would fit that criteria, he added.
Slowing the increases in paychecks is likely to be difficult, he said, because robust wage gains are largely being driven by a labor shortage that began during the pandemic and shows no sign of ending soon.
Fed officials had hoped to see the number of people working or looking for work rebound more strongly as the pandemic waned, but that hasn’t happened.
The lack of workers reflects a jump in early retirements, the deaths of several hundred thousand working-age people from Covid-19, and a sharp decline in immigration and slower population growth, Powell said.
With the supply of workers limited, the Fed’s higher interest rate policies will have to reduce businesses’ demand for new employees to meet the lower level of supply, he added.
Economists generally expect that will mean rising layoffs and a higher unemployment rate, with the economy potentially falling into a recession.
But Powell, in remarks during a question-and-answer session, held out hope that employers could cut the near record-high number of job openings they have posted, rather than lay off large numbers of workers.