MNI: Powell Not Yet Confident Fed Sufficiently Restrictive

The Federal Reserve will not hesitate to tighten monetary policy further if recent progress on inflation turns out to be a "head fake" or if stronger growth prevents further balancing in the labor market and undermines inflation progress, Fed Chair Jerome Powell said Thursday.

The Fed expects GDP growth to moderate in coming quarters, but "that remains to be seen," he said in prepared remarks. "We are attentive to the risk that stronger growth could undermine further progress in restoring balance to the labor market and in bringing inflation down, which could warrant a response from monetary policy."

The Fed "is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time; we are not confident that we have achieved such a stance," Powell said. The Fed will "move carefully" so that the central bank can address the risk of being misled by a few good months of data, and the risk of overtightening, he said.

The Fed has been gratified by the decline in inflation but there is still a long way to go to get inflation sustainably to 2%, he said. The labor market remains tight, although improvements in labor supply and a gradual easing in demand continue to move it into better balance. (See: MNI: Fed's Barkin Sees Sticky Inflation, Policy Lags)

HEAD FAKES

"We know that ongoing progress toward our 2% goal is not assured: Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so."

The FOMC has raised the federal funds rate target range to 5.25-5.5% and has reduced its securities holdings by over USD1 trillion. "Monetary policy is in restrictive territory and putting downward pressure on demand and inflation," Powell said.

"We are making decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks, determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time."

Powell added said the supply recovery continues but it is not clear how much more those improvements can help pull inflation down. "Going forward, it may be that a greater share of the progress in reducing inflation will have to come from tight monetary policy restraining the growth of aggregate demand," he said.