MNI: Powell Says Fed May Need Restrictive Stance For Some Time

Federal Reserve Chair Jerome Powell on Friday pledged unconditionally to return inflation to 2%, saying this will likely mean taking policy into restrictive territory and holding it there for some time -- even if it means a slowing economy.

"Restoring price stability will likely require maintaining a restrictive policy stance for some time," he told attendees at the first in-person annual Jackson Hole symposium since 2019, and warned the Fed will not turn around and ease soon. "The historical record cautions strongly against prematurely loosening policy."

While not tipping off plans for September between a 50bp versus 75bp move, Powell said being near estimates of longer-run neutral is not a place to stop or pause but noted that he had previously said another "unusually large" increase could be appropriate. Policy makers will make that decision later with the "totality" of data in hand, Powell said. (See MNI INTERVIEW: Fed's Harker Wants Rates Above 3.4% By Year-End)

"At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases," he added.

The Fed chair said inflation has continued to spread through the economy and noted lower inflation readings for July as "welcome," but added that a "single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down."

BELOW-TREND GROWTH

The U.S. central bank chief also said he is expecting weakness in the economy going forward. There will very likely be some softening of labor market conditions, he said, and reducing inflation is likely to require a "sustained period of below-trend growth." Powell characterized the labor market as "out of balance," with demand "substantially" exceeding supply.

"But a failure to restore price stability would mean far greater pain," he added, in a short and more direct five-page speech. "Our responsibility to deliver price stability is unconditional."

The FOMC at its July 26-27 meeting raised the fed funds rate to a range of 2.25%-2.5% and Chair Powell then pointed to the June SEP as the best estimate showing rates reaching a "somewhere between 3% and 3.5%" by the end of the year.

In his speech noting inflation-fighting lessons from the Volcker era, Powell did not provide a more specific update on the rate outlook for this year, only noting that the FOMC will be providing fresh forecasts in September.

The U.S. government reported before Powell's speech that PCE inflation fell 0.1% in July while core PCE inflation increased 0.1%, a bigger slowdown than expected.