Powell: Rates to stay higher longer
The move underscores single-minded focus to combat mulish inflation
The Federal Reserve will push rates higher than previously expected and keep them there for an extended period, Chair Jerome Powell said Wednesday in remarks likely intended to underscore the Fed's singleminded focus on combating stubborn inflation.
Yet in a speech at the Brookings Institution, Powell also signaled that the Fed may increase its key interest rate by a halfpoint at its December meeting, a smaller boost after four straight three-quarter 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 is seeking to increase its benchmark rate by enough to slow the economy, hiring and wage growth, but not so much as to send the U.S. into recession.
It has lifted the rate six times this year to a range of 3.75% to 4%, 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 Dec. 13-14.
Financial markets rallied in response to Powell's suggestion that rate increases will slow. The S&P 500 jumped 122 points, or 3.1%. It had fallen before Powell spoke.
But Powell also stressed that smaller hikes shouldn't be taken as a sign the Fed will 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.”
Powell 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 that 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 will likely be much harder to rein in, he said.
“Despite some promising developments, we have a long way to go in restoring price stability,” Powell said.
The Fed chair singled out strong hiring and wage gains as the main driver keeping services costs high. Paychecks, on average, have jumped about 5% 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% inflation over time,” Powell said. Wage growth at about 3.5% a year would fit that criteria, he said.
Slowing the increases in paychecks will likely 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.