MNI FED WATCH: Proceeding Carefully To Peak Rates

A more resilient U.S. economy calls for the Federal Reserve to keep interest rates at their cycle peak further into 2024 and potentially higher for even longer, Fed Chair Jerome Powell said Wednesday after the FOMC opted to wait on deciding whether to boost rates by a last quarter-point.

The majority of FOMC members still expect one more hike before the year's out, while the size of anticipated cuts next year shrank to just half a percentage point from a full point in June.

"Rather than pointing to a sense of inflation having become more persistent," Powell said, "it's more about stronger economic activity." Median growth projections more than doubled for the year, to 2.1% from 1.0% in June, while headline PCE inflation projections added a tenth to 3.3%.

"Broadly, stronger economic activity means we have to do more with rates," Powell said. (See MNI INTERVIEW: Resilience Calls For More Fed Tightening-Tracy)

NEED MORE DATA

A few more officials also raised their estimate of the longer run fed funds rate, a proxy for the unknown neutral rate that would neither stimulate nor restrain the economy. The central tendency of projections for the longer run fed funds rate rose to 2.5%-3.3% from 2.5%-2.8% in June.

Powell acknowledged a rising neutral rate could exert an upward pull on the Fed's benchmark rates.

"It may, of course, be that the neutral rate has risen," he said. "What we write down in the (Summary of Economic Projections) is the longer run rate. It is certainly possible that the neutral rate at this moment is higher than that. And that that's part of the explanation for why the economy has been more resilient than members expected."

(See: MNI INTERVIEW: More FOMC Members Set To Raise R-Star-Rosengren)

In judging whether the policy stance is sufficiently restrictive, Powell said the committee is looking for a few more readings on slowing inflation and a rebalancing of the labor market similar to those of the past few months.

"We need to get to a place where we are confident that we have a stance that will bring inflation down to 2% over time," Powell said. "Given how far we've come and how quickly we've come, we are actually in a position to be able to proceed carefully as we assess the incoming data and the evolving outlooks and risks and make these decisions meeting by meeting."

CUTS DOWN THE ROAD

The combination of an unwinding of pandemic-related demand and supply distortions and monetary policy in suppressing high demand is working, Powell said.

He acknowledged that rates will need to fall in the future to keep real rates at an appropriate level, but "It's not something we are thinking about at all right now."

The Fed is still trying to find the right peak level at which to sit for a while, he said.

"You know sufficiently restrictive only when you see it," he said. "Then the question is how long do you stay at that level and that's another set of questions. For now, the question is trying to find that level where we think we can stay there. And we haven't gotten to a point of confidence about that yet."