Fed Chair Powell sees progress on inflation, but not quickly enough

WASHINGTON (AP) – Inflation may be cooling — just not fast enough for the Federal Reserve yet.

Chairman Jerome Powell on Wednesday gave a nuanced view of how the Fed intends to meet its core challenge at a time when inflation is both ways below the peak. but still well above the central bank’s target of 2%: Give it more time, and perhaps some help from further rate rises.

But on a hopeful note, Powell also suggested that the trends needed to further slow inflation, from lower rents to slower growing wages, are starting to click into place.

As a result, the Fed decided on Wednesday to forego another increase in the benchmark interest rate, leaving it at around 5.1[ads1]%. The break followed 10 straight hikes in 15 months — the fastest streak of increases in four decades.

By leaving rates alone, at least for now, Powell and other top Fed officials hope to use the extra time to assess how higher loan interest rates have affected inflation and the economy. They will also see whether the collapse of three large banks this spring will weigh on lending and growth.

In a surprisingly hawkish signal, Fed officials on Wednesday issued estimates showing they envision as many as two additional rate hikes on a quarter-point basis before the year ends. (Hawks generally favor higher rates to curb inflation, while doves typically advocate lower rates to help a healthy labor market.) Before this week’s policy meeting, Fed watchers had expected officials to signal just one more rate hike this year.

In their new estimates, the members of the Fed’s interest rate committee were less divided than many economists had expected, with 12 of the 18 policymakers envisioning at least two more quarter-point rate hikes. Four favored a quarter-point hike. Only two envisioned keeping prices unchanged. The politicians also predicted that their benchmark interest rate will stay higher for longer than they had envisaged three months ago.

Powell noted that many economists expect rental costs, a key driver of current inflation, to decline steadily in the coming months. He also said wage growth has slowed and noted some signs that the labor market is cooling. These factors, he added, should reduce inflationary pressures.

“I would almost say that the conditions that we need to see in place to bring down inflation are coming into place,” Powell said. “But the process of actually working with inflation is going to take some time.”

Inflation fell to 4% in May compared to a year ago, down sharply from a peak of 9.1% in June last year. And many economists expect it to decline further. Rental costs are falling, and used car prices, which rose in April and May, are likely to fall as well.

Nevertheless, Powell emphasized that the Fed must feel confident that inflation is moving steadily closer to the 2% target.

“We’re two and a quarter years into this, and forecasters, including Fed forecasters, have consistently thought that inflation was coming down … and were wrong,” he said. “We want to get inflation down to 2% and we just don’t see it yet.”

Still, Powell stopped short of saying that Fed policymakers have committed to resuming their hikes when they next meet in late July. At one point in the press conference, he referred to Wednesday’s decision as a “jump,” which would mean the Fed planned to raise interest rates at the July meeting.

He then corrected himself: “I shouldn’t call it a jump,” he said.

But Powell stressed that the Fed wants to move more slowly after its blistering pace last year, when it made four straight three-quarter hikes, followed by a half-point increase and then three-quarter hikes this year.

The Fed’s aggressive series of interest rate hikes, which have given mortgages, car loans, credit cards and business loans more expensive, have been intended to slow spending and defeat the worst bout of inflation in four decades. Average credit card rates have surged 20% to record highs.

“Given how far we’ve come, it might make sense for interest rates to move higher, but at a more moderate pace,” he said. “It’s just the idea that we’re trying to get this right.”

Should inflation fall further, some economists believe the Fed will not actually need to raise interest rates again.

“With inflation set to moderate markedly, we are skeptical that the Fed will resume rate hikes,” Ryan Sweet, chief U.S. economist at Oxford Economics, wrote in a note. “Our baseline forecast is that the Fed will remain on hold through the remainder of this year before gradually easing in early 2024.”

One reason Fed officials may be predicting further rate hikes is that the economy has remained surprisingly robust this year, with more persistent inflation that may require higher interest rates to cool. Their updated forecasts show they predict economic growth of 1% for 2023, an upgrade from a meager 0.4% forecast in March. And they expect “core” inflation, which excludes volatile food and energy prices, to be 3.9% at the end of the year, higher than they expected three months ago.

Powell and other policymakers have also indicated that they want to assess how much a pullback in bank lending could weaken the economy. Banks have slowed their lending – and demand for loans has fallen – as interest rates have risen. Some analysts have expressed concern that the collapse of three major banks last spring could prompt nervous lenders to sharply tighten loan qualifications.

The economy has so far fared better than the central bank and most economists had expected at the start of the year. Companies are still hiring at a robust pacewhich has helped encourage many people to continue using, especially for travel, dining out and entertainment.

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