MNI: Powell: Peak US Rate 'Somewhat Higher' Than Sept Forecast

Peak U.S. interest rates next year are likely to be "somewhat higher" than the FOMC projected in September and stay restrictive "for some time" as the Federal Reserve seeks to cool demand and restore balance in the overheated labor market, Fed Chair Jerome Powell said Wednesday.

The FOMC will likely slow the pace of its rate hikes at its meeting in two weeks, but that's less relevant than how long rates will need to stay at that level, he added.

"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting," Powell said in remarks prepared for a Brookings Institution appearance.

But, "given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level."

RESTRICTIVE FOR SOME TIME

The FOMC has said it anticipates that ongoing increases will be appropriate. "It seems to me likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting and Summary of Economic Projections," Powell said.

The median FOMC forecast for rates at the end of 2023 in September was 4.6%.

He added: "It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done."

Despite encouraging signs that goods inflation and housing inflation are headed lower, a shortage of workers and fast wage growth are still generating too-high services inflation outside of housing, which Powell called the most important category for understanding how inflation will evolve.

LABOR MARKET TIGHTNESS

The labor market is showing only "tentative signs" of rebalancing, despite the Fed's historically speedy rate hike campaign this year, Powell said. The same is true for wage growth, he added.

An estimated 3.5 million people are still missing from the workforce, he said. More than 2 million of those are retirees while the rest may be a lack of immigrants or deaths from the pandemic.

"Demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2% inflation over time," he said.

"Despite some promising developments, we have a long way to go in restoring price stability."