Federal Reserve Chair Jerome Powell said officials would not flinch in the fight to contain inflation, fueling expectations that they will deliver a third straight jumbo rate hike later this month.
“We must act now, bluntly and decisively, as we have done so far,” Powell said in a recent speech at the Cato Institute’s monetary policy conference in Washington.
“My colleagues and I are strongly committed to this project and will remain committed to it.” He spoke to a moderator in a virtual question-and-answer session.
US Federal Reserve officials are rapidly raising interest rates in a bid to curb the hottest inflation in four decades. They next meet on September 20-21, and Powell has kept open the option for another 75 basis point hike — after hikes of that magnitude in June and July — or a half-point hike. He said the decision would depend on the “wholeness” of incoming data.
Officials will have an important update on Tuesday with the release of consumer prices for August. Economists polled by Bloomberg are forecasting an 8.1% increase over the 12-month period, up from 8.5% in July.
“The Fed has and accepts responsibility for price stability,” Powell said, noting that history warns of premature monetary easing. That reiterates a warning he issued Aug. 26 at the Fed’s annual retreat in Jackson Hole, Wyoming.
Investors have increased their bets that the Fed would make it big again after hawkish comments from other Fed officials. That trend continued after the European Central Bank hiked interest rates by 75 basis points earlier on Thursday and futures markets are showing that a Fed hike of this magnitude is almost fully priced in later this month.
The former Fed doves didn’t back down either. Chicago Fed President Charles Evans said later Thursday in Illinois that officials “could very well do 75 in September,” noting that while he hasn’t made up his mind yet, “I know we’re going to look at interest rates to raise to a much higher level than now.”
Additionally, a growing number of economists see a 75 basis point hike as a likely outcome. Following Thursday’s comments, analysts at Bank of America Corp., Barclays Plc and Jefferies LLC revised their forecast from a 50 basis point hike to the jumbo move. Economists at Goldman Sachs Group Inc. did the same late Wednesday.
The US economy has performed well thanks to resilient consumer spending, even as higher interest rates weigh on real estate and investments. The labor market remains strong with an unemployment rate of 3.7%.
“The demand on the labor market is still very, very strong. We’re still printing new payslips at high levels, wages are running at an elevated level,” Powell said. “Through our policy interventions, we hope to achieve a period of below-trend growth that will result in the labor market rebalancing and wages falling back to levels more consistent with 2% inflation. ”
Fed officials are hoping to stage a rare soft landing where growth slows and inflation falls, leading to low employment costs. However, they are also concerned that after more than a year above their 2% target, public expectations for future prices are starting to rise.
They have clearly signaled that the way they intend to combat this drift is to drive up the cost of borrowing even more and keep it there for a long time. If that’s the strategy dominating the debate this month, then it argues for another jumbo move.
“It’s very important that inflation expectations remain anchored,” Powell said, adding that the “clock is ticking” to ensure they stay that way.
“The longer inflation stays well above target, the greater the concern that the public will start to naturally factor higher inflation into their economic decision-making,” he said. “Our job is to make sure that doesn’t happen.”
(Updates with Evans comment in seventh paragraph.)
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