Federal Reserve Chair Jerome Powell on Friday said his colleagues think that it will take some time to bring inflation back to the central bank’s 2% target.
“The data have continued to support the FOMC’s view that bringing inflation down will take some time,” Powell said during a moderated appearance alongside former Fed chief Ben Bernanke.
Financial markets are pricing in two 25 basis point interest rate cuts later this year. The Fed’s projections show no cuts into 2024.
Powell said the disconnect doesn’t seem to be a lack of belief in the Fed’s inflation-fighting stance.
Instead, it is just “simply a different forecast” where the market expects inflation to come down more quickly, perhaps due to a significant downturn, Powell said.
Many economists are worried that the market expects the Fed to ride to the rescue and cut rates at the first whiff of a recession. They argue this would be terrible policy and allow inflation to persist. Instead, the central bank will need to keep rates high in a downturn to wring inflation out of the economy.
The Fed has pushed rates above 5% in a steady string of rate hikes since last March.
Powell said the level of interest rates is now high enough to be “restrictive” or slowing growth. He said the Fed faces uncertainty about whether the full effect of the quick rate hikes will slow the economy and the extend of credit tightening from recent banking stress.
Tighter credit conditions are likely to slow economic growth, hiring and inflation, Powell said.
“So, as a result. our policy rate may not need to rise as much as it would have otherwise to achieve our goals,” Powell said, although this was highly uncertain.
Fed officials in recent speeches have been debating whether to “skip” or pause a rate hike in June. Officials have said they want to see all the data at the June meeting before making a decision.
Powell confirmed that the Fed has not already decided what to do in June.
“We haven’t made any decisions about the extent to which any additional policy firming will be appropriate,” Powell said.
Given the recent rate hikes “we can afford to look at the data and the evolving outlook and make careful assessments,’ he added.
Stocks
DJIA,
SPX,
were lower on concern over an impasse in the debt ceiling discussions between the White House and House Republicans. The yield on the 10-year Treasury note
TMUBMUSD10Y,
rose to 3.67%.
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