Fed Chair Powell Doubts Current Policy Can Curb Inflation

• Powell said the Fed remains committed to lowering inflation, though it is unsure if rates are high enough yet. Despite recent slowdowns in price increases, policy may need to become more restrictive to reach the 2% inflation target.
• The Fed has aggressively hiked rates this year from near zero to 5.25-5.5%, contributing to inflation declining from 9% to 6.5%. However, Powell emphasized there is more work to do to reach healthy inflation levels.
• Powell noted the risks of tightening too much or too little are more balanced now. The Fed will continue to “move carefully” based on data, raising rates further if needed but remaining attuned to overtightening risks. Markets shouldn’t bet on rate cuts in 2023 yet as the Fed sticks to its inflation-fighting mandate.

Powell Says More Policy Tightening May Be Needed

Federal Reserve Chair Jerome Powell said on Thursday that he and his colleagues remain committed to bringing down inflation, but they are unsure if they have raised rates high enough yet.

In remarks prepared for an International Monetary Fund event, Powell acknowledged the recent slowdown in price increases. However, he stressed that policy may need to become even more restrictive to meet the Fed’s 2% inflation target over time.

The Path So Far

The Fed has hiked rates aggressively this year, from near zero to a range of 5.25-5.5%, in its effort to curb inflation.

The central bank’s actions have contributed to a decline in inflation from a peak of 9% last summer to 6.5% now, based on the consumer price index.

But Powell emphasized the Fed has more work to do get inflation back to healthy levels. He said the process of reaching the 2% goal “has a long way to go.”

Proceeding With Caution

Despite the progress, Powell noted the Fed can be cautious at this point.

The risks between tightening too much or too little are more balanced now, he said. The Fed will continue to “move carefully” in response to the data.

Powell stated the Fed will further raise rates if needed. But it will also be attuned to the risks of overtightening, he added.

Markets Expect Rate Cuts in 2023

Investors widely expect the Fed to stop hiking rates soon. Futures pricing shows little chance of another increase at the December meeting.

Traders are betting on rate cuts starting next summer. But Powell warned investors against getting too optimistic about cuts in 2023.

The Fed will stick to its inflation-fighting mandate, he emphasized. It will boost rates again if price pressures reaccelerate.

Conclusion

Powell’s remarks highlight the Fed’s data-dependent approach. For now, policymakers feel inflation is still too high despite some improvement.

But they are also cautious about tightening too aggressively. The Fed is ready to respond in either direction depending on the economic data.