- author, Farah Masood
- stock, Business letter
US Federal Reserve Chairman Jerome Powell said the bank would continue to raise interest rates “as long as appropriate” when inflation was “very high”.
And at the annual meeting of U.S. central bankers in Jackson Hole, Wyoming, Powell said the pace of rate hikes has slowed since the peak.
However, inflation is still above the central bank’s target of 2%.
Powell predicted that interest rates could rise further and remain high for a long time.
Inflation in the United States hit 3.2% in the year to July, while the key interest rate hit 5.25% – the highest in 22 years – and it comes after 11 consecutive hikes in interest rates since the start of 2022.
“Although inflation has peaked – a welcome development – it is still very high,” Powell added.
He hinted at the possibility of further interest rate hikes if necessary, as well as continuing to pursue monetary policy at a restrained level until inflation is assured of moving towards the target.
Powell said the central bank would “act with caution,” citing the effects of Russia’s continued invasion of Ukraine as one of the factors pushing up prices globally.
He said food and energy prices continue to be volatile, although the high inflation rate has eased from last year’s 9.1%.
“Unfortunately, a more resilient economy than expected suggests that higher interest rates may be needed, which may or may not be necessary to do enough to meet the 2% inflation target,” said Gary Leahy, an economist at Columbia University.
“The process of getting inflation down to 2% will take a long time,” Powell asserted.
He said the central bank intends to “continue to pursue a policy at a restrained level,” widely expected comments by market analysts.
“This reaffirms that the Fed is going to take a very slow and cautious approach,” said Michael Green, chief investment strategist at Symbi.
Powell pointed to the housing market, which is not stable enough.
“After falling sharply in the last 18 months, the housing sector is showing signs of picking up again and this may warrant further tightening of monetary policy,” he added.
He also noted that the Fed needs flexibility from the labor market before interest rates begin to fall as wage growth continues as employers pay higher wages to attract workers in a shrinking labor market.
In theory, higher wages lead to higher inflation, thus perpetuating the need for higher interest rates.
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