MNI STATE OF PLAY: Powell Signals 75bp Sept Fed Hike Possible

A third straight 0.75 percentage point increase in the Federal Reserve's benchmark policy rate could be possible in September with inflation much too high and the labor market still extremely tight, Fed Chair Jerome Powell said Wednesday.

The FOMC lifted the fed funds rates target by the unusually large step at its July meeting Wednesday even as Powell acknowledged growth in consumer spending has slowed significantly, housing activity has weakened and business investment looks to extend its decline in the second half.

"I don't think the U.S. is currently in a recession, and the reason is there are too many areas of the economy that are performing too well," Powell told reporters. "I'd point to the labor market in particular."

Bringing inflation down remains the Fed's overarching focus, he said.

"There's probably significant additional tightening in the pipeline," Powell said. "While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then." (See MNI: CPI Shortens Odds Of 75BP Hike In Sept.-Ex-Fed Staff)

GUIDANCE LESS CLEAR

Now that the fed funds rate target stands at 2.25%-2.50%, within the range of Fed estimates of a neutral policy level, Powell said the committee would refrain from providing clear guidance on the pace of future rate increases.

"As the stance of monetary policy tightens further, it'll become appropriate to slow the pace of increases while we assess how cumulative policy adjustments are affecting the economy and inflation," he said. However, "we think it's time to just go to a meeting by meeting basis and not provide the kind of clear guidance that we had provided on the way to neutral."

The Fed wants to see demand running below-potential "for a sustained period to create slack and give inflation a chance to come down," he added.

And if inflation momentum continues to move in the wrong direction, "we wouldn't hesitate to make an even larger move if appropriate." (See MNI INTERVIEW: Fed To Hike Into Weaker Growth If Inflation High)

LABOR MARKET OVERHEATED

The FOMC wants to get policy to a "moderately restrictive level," Powell said, and its June economic projections remains "the best guide we have as to where the committee think it needs to get at the end of the year and into next year." Officials in June saw rates rising to 3.4% by December and 3.8% next year.

Bringing demand back to a sustainable level will involve necessary softening in labor market conditions, Powell said. U.S. employers added jobs at a robust 375,000 pace on average over the past three months, and the 3.6% unemployment rate is a 50-year low. Job openings are plentiful and wage measures are also running very strong.

"That's a remarkably strong level for this state of affairs," Powell said. "We're not trying to have a recession and we don't think we have to. We think there's a path for us to bring inflation down while sustaining a strong labor market."