Powell, the chair of the U.S. Federal Reserve, stressed that additional rate increases will likely be needed for some time as the inflation battle continues. He described the disinflation process as just beginning and still with a long way to go.
In a speech at the Economic Club of Washington, Powell noted that policy makers expect further rate rises and a period of holding steady on policy. He warned that the path will likely feature ups and downs as the economy adjusts.
The Fed aims to return inflation to 2 percent, a target that won’t be reached immediately. Powell said 2023 should be a year of meaningful declines, but attaining the 2 percent level will require progress not only this year but into the next as well.
Hence, he argued, further rate hikes will be necessary, followed by assessments to ensure policy is doing enough.
Eighth consecutive rate increase
Powell spoke a week after the Fed announced its eighth straight quarter-point hike, a pause in the pace of increases though. The policy decision kept the federal funds rate in a range between 4.5 percent and 4.75 percent, the highest since September 2007.
Inflation in the United States has fallen from its June peak of 9.1 percent to about 6.5 percent, with December marking the sixth straight monthly decline, suggesting rate hikes are beginning to bite the economy.
However, the labor market remained robust, with January data showing more than half a million new jobs. Powell acknowledged that such strength challenges traditional theories about how rate changes affect employment.
Looking at history, there is usually some softening in the labor market when rates rise, but this cycle appears distinct, partly because the pandemic era has ended. Powell noted that the supply of workers exceeds current demand by about 5 million, a gap not seen before the pandemic and one that has left a lasting mark on the U.S. workforce.
He added that the economy will need to slow to keep inflation in check, but it is not a bad thing if the labor market stays strong. The job market remains a sign of underlying strength in the economy, and it is encouraging that inflation can begin to fall even before a notable weakening in employment occurs.
US economy growth
The first annual GDP estimate from the Bureau of Economic Analysis (BEA) reported that the U.S. economy grew by 2.1 percent in 2022. The pace was 0.7 percent higher than the prior quarter, implying an annual growth rate near 2.9 percent.
For 2023, expectations pointed to a moderation. The IMF projected growth around 1.4 percent for 2023 and roughly 1 percent for 2024, reflecting global uncertainties including geopolitical tensions and monetary policy actions abroad that could influence inflation trajectories.
These developments unfold in a landscape marked by the war in Ukraine and the ripple effects of higher rates around the world. The Fed began lifting rates in March 2022 by 0.25 percentage points, then accelerated to 0.5 points in May, and continued with a sequence of 0.75 point increases through June, before pausing and adjusting in the following months.
(BEA)
In this environment, the central bank has signaled patience while monitoring inflation and employment, balancing the need to cool prices with the strength seen in the labor market.