WASHINGTON (AP) – Inflation may be cooling, but not fast enough for the Federal Reserve yet.
Fed Chairman Jerome Powell on Wednesday gave a nuanced view on how the Fed intends to address its core challenges at a time when inflation is well below its peak. However, it is still well above the central bank’s target of 2%. We may need to give it a little more time and support with more rate hikes.
But in a hopeful view, Powell also suggested that the trends needed to slow inflation further, from falling apartment rents to slowing wage growth, are starting to materialize.
As a result, the Fed on Wednesday decided not to raise the benchmark rate further, leaving the rate unchanged at about 5.1%. The moratorium marks the fastest rate hike in 40 years, after his 10th straight rate hike in 15 months.
By leaving interest rates alone, at least for now, Mr. Powell and other Fed officials hope to use the extra time to conduct a more complete assessment. How rising borrowing rates are affecting inflation and the economy. They also want to see whether the failures of three major banks this spring will weigh on lending and growth.
In a surprisingly hawkish signal, Fed policymakers released forecasts Wednesday that show they expect two more two-quarter point rate hikes by the end of the year. (In Fed terminology, “hawks” generally support raising interest rates to curb inflation, while “doves” generally advocate lower interest rates to support a healthy job market. ) Before this week’s policy meeting, Fed watchers expected policymakers to signal just one more rate hike. increase this year.
Their new forecast shows members of the Fed’s interest rate committee not as divided as many economists expected., 12 of 18 policymakers expect at least two more quarters of a point rate hike. Four of them supported a one-fourth point hike. Only two companies expected to keep interest rates unchanged. Policymakers also expected policy rates to stay higher for longer than they had expected three months ago.
Fed Fed Chairman Powell said wage growth was slowing and cited some signs that the job market was cooling. These factors should ease inflationary pressures, he added..
“It’s safe to say that the conditions necessary to bring inflation down are coming together,” Powell said. “But the process of that actually working on inflation will take some time.”
Inflation drops to 4% y/y in May, down significantly from its peak of 9.1% in June last year. And many economists expect it to fall further. Rental costs are falling, and used-car prices, which surged in April and May, may also fall.
Still, Powell stressed that the Fed needs to be confident that inflation is steadily approaching its 2% target.
“It’s been two and a half years since things started, and forecasters, including those at the Fed, have consistently thought inflation was coming down soon, and they were wrong,” he said. Stated. “We want inflation to go down to 2%, but we don’t see it yet.”
At the same time, Powell did not say that Fed policymakers had promised to resume rate hikes at their next meeting in late July. At one point during the press conference, he referred to Wednesday’s decision as “skipping,” suggesting the Fed plans to raise rates at its July meeting.
He then corrected, “You shouldn’t call this a skip.”
But Powell said the Fed will be slowing down after four consecutive 3/4-point rate hikes last year, followed by a half-point hike, and a blistering 3-quarter point hike this year. He emphasized that he wants a move like this.
Mortgages, auto loans and credit cards collapsed as the Fed aggressively hiked interest rates The aim was to curb spending and beat the worst inflation in 40 years. The average interest rate on credit cards is above 20%, the highest ever.
“It may make sense for interest rates to rise at a slower pace, given the track record so far,” he said. “It’s just the idea that we’re trying to get this right.”
Some economists believe that if inflation falls further, the Fed may not actually need to raise rates again.
“With inflation slowing markedly, I am skeptical that the Fed will resume rate hikes,” Ryan Sweet, chief U.S. economist at Oxford Economics, said in a note. “Our baseline forecast is for the Fed to remain on hold for the rest of the year, before easing gradually in early 2024.”
One reason Fed officials may be predicting more rate hikes is that the economy has remained surprisingly resilient this year, inflation has been more persistent, and rate hikes are needed to cool it down. because it may be necessary. The latest forecast calls for economic growth of 1% in 2023, up from just 0.4% forecast in March. It also expects “core” inflation, which excludes volatile food and energy prices, to reach 3.9% by the end of the year, higher than expected three months ago.
Mr. Powell and other policymakers have also said they want to assess how much the cut in bank lending could undermine the economy. As interest rates rise, banks are curbing lending, and the demand for loans is also declining. Some analysts have expressed concern over the collapse of three major banks. The impact of last spring could cause nervous financiers to significantly tighten lending eligibility.
The economy is doing better so far than central banks and most economists expected at the start of the year.Companies are still hiring at a solid paceThis has encouraged many to continue spending, especially on travel, dining out and entertainment.
