This will be a process that will take a significant period of time, the Fed chairman believes
Federal Reserve Chairman Jerome Powell said further interest rate hikes will be needed to cool inflation amid a labor market that remains very strong, according to recent data.
“We think we’re going to have to make further increases in interest rates,” Powell said Tuesday during a question-and-answer session with David Rubenstein at the Economic Club of Washington. “The labor market is extremely strong.”
Stocks and Treasuries rose during Powell’s speech after he did not take a more hawkish stance on interest rates following the good jobs data.
“The process of disinflation, the process of reducing inflation, has begun, and it has begun in the goods sector, which is about a quarter of our economy,” the central bank chief said at an event in Washington, D.C., “but it has a way to go a long way to go. These are very early stages.”
“We expect 2023 to be a year of significant decline in inflation. In fact, it’s our job to make sure that’s the case,” he said. “My guess is that it’s certainly going to take (time, ed.) not only this year but next year to down close to 2%”.
Powell’s first mention of “disinflationary” trends was at his post-meeting news conference last Wednesday. Markets latched on to this term and briefly rallied before becoming volatile over the past few sessions.
One piece of data working against the Fed was the robust January employment report released last Friday, which showed nonfarm payrolls rose by 517,000 in January.
Asked if he would have raised rates by 50 basis points last week, instead of 25 basis points as bankers did, he was evasive.
“Unfortunately, we don’t have the ability to play that way,” he told Rubenstein, who hosts a show on Bloomberg Television.
After a string of big rate hikes last year, Powell and his colleagues are slowing the pace, while noting that they are still targeting hikes.
In response to Friday’s much stronger-than-expected January jobs report, investors now expect interest rates to rise to just above 5%, similar to Fed officials’ forecasts from December.
Last week, the Federal Open Market Operations Committee raised its key interest rate by a quarter point to a range of 4.5% to 4.75% and said further increases remained appropriate.
Powell argued that the easing of pressures on the labor market is part of the answer to the question of cooling inflation in the sphere of basic services, excluding the housing sector, an indicator on which he emphasized.
Still, the labor market remains hot, with nonfarm payrolls increasing by 517,000 last month, the Labor Department said Friday, and the unemployment rate falling to 3.4 percent, the lowest since 1969. since then.
Powell said the report “shows you why we think this is going to be a process that will take a significant amount of time.”