Jerome Powell said the Federal Reserve isn't finished with raising interest rates as it battles to get inflation back to its 2% target range.
In a speech to the Jackson Hole symposium of central bankers and policymakers currently underway in Wyoming, the Fed chair said: “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
Powell attributed the stubborn inflation to a collision between robust demand and pandemic-related supply constraints.
He said the Fed’s strategy to combat this involves both addressing supply distortions and slowing aggregate demand growth through monetary tightening.
Powell acknowledged the positive trajectory in inflation reduction but cautioned against premature optimism.
"The effects of Russia's war against Ukraine have been a primary driver of the changes in headline inflation around the world since early 2022," he said.
"Headline inflation is what households and businesses experience most directly. So this decline is very good news. But food and energy prices are influenced by global factors that remain volatile and can provide a misleading signal of where inflation is headed."
Core PCE inflation, which excludes volatile food and energy prices, has gradually declined from its peak of 5.4% in February 2022 to 4.3% in July this year.
However, Powell stressed that sustaining this downward trend requires more than a few favorable months of data. The global influences on food and energy prices add volatility and complexity to the situation.
Powell emphasized the progress made in curbing inflation but underscored the need for continued vigilance. Although recent data is encouraging, he said there's a long road ahead to reach price stability.
“While underlying inflation will settle over coming quarters 12-month core inflation is still elevated and there's substantial further ground to cover to get back to price stability,” he said.
Nothing new
Powell's speech contained nothing new, and merely served to reiterate that the Fed was data-dependent and that rates might need to go higher, commented CMC Markets chief market analyst Michael Hewson.
"He touched upon speculation earlier this week that the Fed might discuss a higher inflation target to 3%, by stamping on it hard, saying that they remained committed to their 2% target," Hewson said.
"This was never a realistic possibility and it's good that Powell strangled it in its infancy, though by doing so it has served to push 2-year yields slightly higher."
After starting the session higher, US stocks turned negative and extended their losses following Powell's speech. Just before 11am ET, the Dow Jones Industrial Average had shed 0.2% to 34,041, the S&P 500 was down 0.3% at 4,364 and the Nasdaq Composite was 0.4% down at 13,414.
~ updated with analyst and market reaction ~
Contact the author at stephen.gunnion@proactiveinvestors.com