Federal Reserve Chairman Jerome Powell expressed cautious optimism about the slowing pace of inflation during a speech on Thursday, but he also indicated that further measures might be necessary to maintain this trend.
His comments were made to an audience at the International Monetary Fund in Washington, D.C., just over a week after the central bank decided to keep benchmark policy rates unchanged.
"The Federal Open Market Committee is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance," Powell stated in his prepared remarks.
His speech was briefly interrupted by climate protesters, marking the second time in recent weeks that his public addresses have been disrupted. Despite the interruption, Powell continued to discuss the current state of inflation, which remains significantly above the Fed's long-term target but has fallen considerably from peak levels seen in the first half of 2022.
The Federal Open Market Committee has implemented a series of 11 rate hikes, marking the most aggressive policy tightening since the early 1980s. This has taken the benchmark rate from near zero to a target range of 5.25%-5.5%. These hikes have coincided with a decrease in the Fed's preferred inflation gauge, the core personal consumption expenditures price index, which has fallen to an annual rate of 3.7% from 5.3% in February 2022.
Despite these improvements, Powell emphasized that inflation is still "well above" the Fed's target. "My colleagues and I are gratified by this progress but expect that the process of getting inflation sustainably down to 2 percent has a long way to go," he said.
His comments triggered a drop in stocks, with the Dow Jones Industrial Average falling close to 200 points. Treasury yields also increased, largely due to a poorly received 30-year bond auction.
Jeffrey Roach, chief economist at LPL Financial, interpreted Powell's remarks as a warning to investors overly optimistic about potential rate cuts in the coming year. "The Fed will be true to its mandate and hike further should inflation reaccelerate," Roach said.
Powell also reiterated the Fed's cautious approach, stating that the risks of over- and under-doing policy measures have become more balanced. "If it becomes appropriate to tighten policy further, we will not hesitate to do so," he said. "We will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening."
Despite these cautionary remarks, markets largely believe that the Fed has finished hiking rates. Futures pricing from the CME Group suggests less than a 10% chance that the FOMC will approve a final rate hike at its December meeting.
Powell also discussed the state of the economy, noting that the gross domestic product had grown at a "quite strong" 4.9% annualized pace in the third quarter. However, he expects this growth to "moderate in coming quarters."
While unemployment remains low, the jobless rate has increased by half a percentage point this year, a trend often associated with recessions. Powell acknowledged this, stating that the Fed is "attentive" to the possibility that stronger than expected growth could undermine efforts to combat inflation and "warrant a response from monetary policy."
He also noted that improvements in supply chains have helped alleviate inflation pressures, but it's unclear how much more can be achieved through additional supply-side improvements. "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," Powell said.
Powell's comments were part of a broader presentation at the Jacques Polak Annual Research Conference. He also addressed the challenge of keeping rates anchored near zero, where they were before the inflation surge. He concluded by saying it is "too soon" to determine whether the challenges associated with zero-rate policies are "a thing of the past."
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