WASHINGTON– Jerome Powell delivered a harsh message at the start of a Wednesday news briefing: Inflation is way too high and the Federal Reserve is lightning fast to tame it with higher borrowing costs.
But despite his firm words, the Fed chair also said for the first time that the central bank’s actions are already having an impact on the economy that could slow the worst inflation the country has seen in four decades.
With the Fed’s interest rate now at levels that are believed to neither boost nor slow growth, the pace of rate hikes could slow in the coming months, Powell said. And he pointed to signs that many companies are finding it easier to fill jobs, a trend that would limit wage increases and potentially slow inflation.
“There has been some evidence that we are closer to the end than to the beginning of the Fed’s effort to tighten credit,” said Michael Feroli, an economist at JPMorgan Chase and a former Fed staffer.
Powell’s suggestion that the Fed could moderate its future rate hikes, after announcing a three-quarter-point hike on Wednesday — the second in a row of this sizeable magnitude — helped launch a solemn rally in the stock market, with the S&P 500 rose 2.6% and the tech-heavy Nasdaq rose 4.1%, its biggest gain in more than two years.
Some economists did not share the markets’ optimism. They noted that Powell was keeping the door open for another big rate hike when the Fed next meets in September. The Fed Chair also pointed out that even if the economy were to fall into recession, the central bank would continue to hike rates if it deemed it necessary to curb still-high inflation.
When asked at his press conference whether a recession would change the Fed’s rate hike trajectory, Powell said simply, “Our focus will be on bringing inflation back down.”
Here are five takeaways from the Fed’s rate-setting meeting and Powell press conference:
POWELL: US NOT IN RECESSION
A raft of recent data has signaled that the economy is weakening. Economists are increasingly forecasting a recession later this year or in 2023. However, Powell cited the resilient job market on Wednesday as evidence the economy is not in recession, at least not yet.
He noted that employers added 2.7 million jobs in the first half of the year, the US unemployment rate is near a 50-year low at 3.6%, and wage growth is strong.
“It doesn’t make sense that the economy could be in recession when something like this happens,” the Fed chair said.
JOBS ABOVE GDP
On Thursday, the government will estimate second-quarter gross domestic product, the broadest measure of the country’s production of goods and services. Some economists believe the GDP report will show the economy contracted for a second straight quarter, which would fit an informal definition of a recession.
But even if this is the case, the most widely accepted definition of a recession is that of the National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that spreads throughout of the entire economy and lasts more than a few months.”
Powell also pointed out that the government’s estimate of quarterly GDP is often subject to significant subsequent revisions, and that early reports on economic growth should be taken with “a grain of salt.”
The Fed Chair warned of this, noting that there are signs that momentum in the labor market is slowing. Job vacancies have fallen slightly, more people are seeking unemployment benefits and the number of new hires is lower than at the start of the year.
SLOW GROWTH, GOOD SETTINGS
But even these signs of a slightly weaker job market aren’t all bad news, at least from the Fed’s perspective.
The Fed wants to cool the economy by raising interest rates that make home mortgages, car loans and corporate loans more expensive. As consumers and businesses spend less, the resulting fall in demand may push inflation closer to the Fed’s 2% target for the year.
“We think there is a need to slow growth, and growth will slow this year,” Powell said.
HOW HIGH WILL THE RATES GO?
Since the beginning of this year, the Fed has been steadily raising its forecasts of how quickly and by how much it would need to raise interest rates to beat inflation. On Wednesday, however, Powell said the estimates made by Fed policymakers a month ago of where rates would go next are still the best guide.
In June, officials forecast that the Fed’s interest rate would hit between 3.25% and 3.5% by the end of this year, which Powell said was a “moderately restrictive” level. And at least two more rate hikes have been forecast for the next year.
In order for the Fed to hit that target by the end of the year, it would need a half-point hike in September and two quarter-point hikes in November and December. Such hikes would represent a much more modest pace than the 2.25 percentage point hike the Fed has now implemented in just the past four meetings, the fastest pace since the early 1980s.
THE FED IS NOT ALONE
Other major central banks around the world have also pushed through large rate hikes to combat inflation, which has skyrocketed in almost all advanced economies.
The European Union raised its short-term interest rate by half a point last week. The Bank of Canada announced a full percentage point hike earlier this month. Last month, the Swiss National Bank implemented a half-point hike, the first hike in 15 years.
While higher global interest rates could help dampen inflation, they also risk causing a global economic slowdown.
This week the International Monetary Fund downgraded its outlook for global economic growth to 3.2% this year. That was down from a 3.6% estimate in April and much slower than last year’s 6.1% pace.
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