Fed chair signals smaller rate hikes as inflation fight goes on
WASHINGTON — The Federal Reserve is preparing to slow the rapid pace of its interest rate hikes but will likely keep borrowing costs higher for longer than previously expected to get the economy on stable footing, the central bank’s chief said on Wednesday.
In a speech at the Brookings Institution, Fed Chair Jerome Powell said the central bank saw some signs that inflation was easing in the costs of goods and housing, but that the tight labor market remained a problem for controlling prices. The Fed has made huge moves to get interest rates high enough to slow the economy. And Mr. Powell said it makes sense for officials to “moderate the pace” of those increases as soon as the central bank’s upcoming meeting in mid-December.
More important, though, will be how much further rates climb next year, and how long it will be necessary to hold them high enough to slash inflation and bring the labor market into sync with the broader economy’s needs.
“It is likely that restoring price stability will require holding policy at a restrictive level for some time,” Mr. Powell said. “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
The remarks come as financial markets appear to be anxious for any signs that the Fed is ready to ease up on its historic rate hike campaign. Markets were jittery early Wednesday afternoon as investors waited for Mr. Powell’s speech, but quickly flashed green on Mr. Powell’s speech.
Mr. Powell has said that
the Fed’s inflation fight will inflict some pain on households and businesses. But a long-feared recession has yet to arrive, and key pillars of the economy remain remarkably resilient to higher rates. The widely held expectation is that the economy will slow drastically next year, and inflation has brought tremendous uncertainty to every sector. But there is no precedent for the post- pandemic economy, and Mr. Powell’s job is to give some insight into his thinking while acknowledging how confounding the outlook remains.
“The truth is that the path ahead for inflation remains highly uncertain,” Mr. Powell said.
For the Fed to win its inflation fight, Mr. Powell said production bottlenecks must keep easing, though he acknowledged that they’re already on the right path. Inflation on new leases — a crucial housing market indicator — must continue to fall next year. And the labor market must cool down, with wages falling to more sustainable levels.
“Despite some promising developments, we have a long
way to go in restoring price stability,” Mr. Powell said.
Mr. Powell put particular emphasis on the labor market, which has been transformed by the pandemic in ways economists still struggle to understand. The number of job openings far exceeds the number of people looking for work, and Mr. Powell said that the shortfall in labor supply “appears unlikely to fully close anytime soon.” The Fed cannot bring more people back into the labor market, so its goal is to get borrowing costs high enough that businesses pull back on hiring and investing, thus cooling down demand for new workers.
But Mr. Powell said it would also be helpful if other policymakers — he didn’t name any, but the task could fall to Congress or the Biden administration — would help find ways to add workers to the labor force while the Fed focuses on demand for work.
“I will say that policies to support labor force participation could, over time, bring benefits to the workers who join the labor force and support overall economic growth,” Mr. Powell said.