MNI FED WATCH: Powell Withholds Guidance, Keeps September Live

Federal Reserve Chair Jerome Powell Wednesday maintained a hawkish tone without providing much additional guidance on the path of interest rates, emphasizing decisions will be made on a meeting-by-meeting basis and leaving open the possibility of consecutive rate hikes.

"We haven't made a decision to go to every other meeting. We're going to be going meeting by meeting," Powell told reporters. "We haven't made any decisions about any future meetings including the pace at which we consider hiking."

The Fed Chair said it is "certainly possible" to raise rates in September if the data warrants and "I would also say it's possible that we would choose to hold steady at that meeting."

Powell also said "a more gradual pace" of rate hikes may not mean increasing borrowing costs every other meeting, but "it could be two out of three meetings," he said. "It's not an environment where we want to provide a lot of forward guidance. It makes all the sense in the world to slow down as we now make these finely-judged decisions."

RESTRICTIVE

Voting FOMC members unanimously supported a 25 basis point increase Wednesday to a range of 5.25% to 5.5%, the highest in 22 years -- a level Powell characterized as "restrictive" and by placing the real federal funds rate "in a meaningfully positive territory." (MNI INTERVIEW: Monetary Rules Say Fed No Longer Behind Curve)

Still, that may not be sufficient. "What our eyes are telling us is that policy has not been restrictive enough for long enough to have its full desired effect," he said.

The Fed also signaled Wednesday it sees a better economic outlook in the U.S., as the FOMC upgraded its view of growth and Powell updated reporters that staff no longer see a recession on the horizon.

That better growth picture could mean higher rates. "At the margins, stronger growth could lead over time to higher inflation and that would require an appropriate response for monetary policy. We'll be watching that carefully."

While Powell said supply and demand are coming into better balance in the labor market and that inflation has moderated, he stressed the process to getting inflation back to 2% "has a long way to go." He conceded that path could include rate cuts at some point in 2024.

"That's just going to be a judgment that we have to make then a full year from now," he said. "It will be about how confident we are that inflation is in fact coming down to our 2% goal."

Powell also said the Fed could cut the fed funds rate at some point while continuing QT. "There are two independent things. The active tool of monetary policy is rates. But you can imagine circumstances in which it would be appropriate to have them working in what might be seen to be different ways -- but that wouldn't be the case," he said in response to a question from MNI. (MNI INTERVIEW: RRP Drop Creates Headroom For Fed QT)

BANK/FINANCIAL CONDITIONS

The Senior Loan Officer Opinion Survey to be released early next week shows that bank lending conditions are tight and getting tighter with weakening demand, he said. "It gives a picture of pretty tight credit conditions in the economy."

And as financial conditions have been easing in recent weeks amid a weaker dollar and higher equities, Powell showed little concern that it could deter the central bank's fight against inflation.

"In principle that could mean that if financial conditions get looser we have to do more," he said. "But what tends to happen though is financial conditions get in and out of alignment with what we're doing and ultimately over time we get where we need to go."