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The US Federal Reserve is prepared to raise interest rates higher — and hold them there — to bring down above-target inflation, but will proceed “carefully” going forward, chairman Jerome Powell said Friday. bulletin news
“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,” he told the Jackson Hole Economic Symposium in Wyoming.
After 11 rate hikes in less than 18 months, the US benchmark lending rate now sits at a range between 5.25 and 5.5 percent — its highest level in 22 years.
However, the rapid cycle of interest rate increases has failed to definitively quash inflation, which remains stuck above the Fed’s long-term target of two percent despite slowing sharply from recent multi-decade highs.
Navigating ‘under cloudy skies’ –
Despite insisting the Fed could yet raise rates, Powell urged caution moving forward during his speech.
“As is often the case, we are navigating by the stars under cloudy skies,” he said.
“Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks.”
US stocks entered a bumpy period following Powell’s remarks, before rising sharply in the afternoon.
“The overall tone of Chair Powell’s Jackson Hole speech is one of cautious optimism coupled with clear determination to take no chances with the inflation outlook,” Pantheon Macroeconomics’ Chief Economist Ian Shepherdson wrote in a note to clients.
“If that requires further tightening, in the Fed’s view, then so be it. But nothing is guaranteed,” he added.
“Relative to market expectations, Powell perhaps delivered a bit more on the side of potential further rate cuts, and a bit less on the idea that average policy rates will be higher,” Citigroup economists wrote in an investor note after the speech.
Reaffirming two percent target –
Powell told the Jackson Hole retreat that the Fed’s two-percent goal “is, and will remain, our inflation target.”
“We will need price stability to achieve a sustained period of strong labor market conditions that benefit all,” he said.
“We will keep at it until the job is done,” he added.
Analysts and policymakers remained split ahead of Powell’s speech on the likelihood of a 12th hike to tackle inflation at the Fed’s next rate-setting meeting, in September.
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Surprisingly strong jobs and growth data in recent months indicate that the US economy is in better health than many economists feared earlier this year when they forecast the country was headed for recession.
In his speech, Powell announced the Fed estimated a slight annual increase in its favored inflation measure in July, known as the personal consumption expenditures (PCE) price index.
PCE inflation in July rose to an annual rate of 3.3 percent, according to the Fed’s calculations. Official figures will be published by the Commerce Department on Thursday.
Futures traders currently assign a probability of around 80 percent that the Fed will vote to pause rates at its rate-setting meeting on September 19-20, according to data from CME Group.
ECB reaffirms inflation target –
The other notable speech Friday came from European Central Bank (ECB) President Christine Lagarde, who is grappling with the challenge of higher inflation and lower growth.
Lagarde said it was crucial for central banks to “provide a nominal anchor for the economy and ensure price stability in line with their respective mandates,” according to prepared remarks.
“In the current environment, this means — for the ECB — setting interest rates at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to our two percent medium-term target,” she added.
Euro area inflation recently declined to an annual rate of 5.3 percent, while growth was barely positive — in sharp contrast with the United States.
However, there are variations within the 20-member Eurozone currency bloc.
Germany, which is Europe’s largest economy, has in recent months been dealing with so-called “stagflation” — a toxic combination of economic stagnation and high inflation.
It is the only G7 economy expected to contract this year, according to the International Monetary Fund, while other large Eurozone economies, like France and Spain, are in better shape.
Against this backdrop, the ECB has had to tread carefully, raising interest rates in smaller increments than the Fed.
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Notes from APS Radio News
According to News Sources and ANS, earlier this year a number of officials said that interest rates would increase to 5.5% to 5.75%. As rates haven’t reached that level, it’s being reported that likely interest rates will increase at sometime before the end of the year.
As it was, last month the Federal Reserve increased interest rates to a range between 5.25% and 5.5%. At that level, interest rates were the highest they’ve been in 22 years.
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The next meeting when the central bank considers whether to increase interest rates is September 19-20.
As economic activity has increased in the past several months, more recently interest rates on long-term government bonds increased levels not seen since 2008.
Those investors who sell those type of Treasury bonds are anticipating that interest rates will fall at some time.
The prices of Treasury bonds are inversely related to the yields of bonds.
As interest rates on long-term bonds have increased, the prices of such bonds have decreased.
Short-terms bonds have seen an increase in yields, too.
News Sources reports that the average 30 year fixed-rate mortgage rose to about 7.3% last month.
As a result, there’s been a decrease in the number of applications filed for mortgages. The number of applications fell to a level not seen in 27 years.
The interest rates of ten year government bonds affect interest rates of 15 and 30 year mortgages.
For a number of years the Federal Reserve has had a 2% inflation rate as a guide by which to increase or lower interest rates or to keep them unchanged.
However, although core inflation increased only .2% in June and again in July, core inflation fails to account for prices of fuel and food, as officials deem those items “too volatile”.
Yet, such commodities form an essential part of purchases.
According to reports, Mr. Powell said that the Federal Reserve would not abandon its 2% inflation standard.
Reportedly because of what was being called a “pandemic”, a number of the world’s central banks embarked on massive programs of monetary expansion, starting in late February and early March of 2020.
For its part, between the early part of March of 2020 to over a year later, the US Federal Reserve added over $4 trillion to its holdings, by purchasing billions of dollars’ worth of Treasury bonds and corporate bonds each month during that period.
As well, at that time it kept interest rates rather low.
Other central banks, including the Bank of Japan and the European Central Bank, followed similar policies.
In addition, during that period many countries engaged in lockdowns; many small and medium-sized businesses and enterprises were shuttered by way of orders issued by public health officials, politicians and various administrators.
One of the direct causes of those shutdowns was the development of shortages.
According to a number of economists, the combination of shortages of various goods and services and massive programs of “quantitative easing” led to substantially higher rates of inflation.
In consequence of shuttered economies and higher rates of inflation in the first world, less developed countries suffered greatly, due, in part, to shortages of supplies and due to lowered demand.
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