Powell: ‘A Long Way to Go’ on Taming Inflation
Powell #Powell
Federal Reserve Chairman Jerome Powell told Congress on Tuesday that inflation is proving harder to corral amid an economy still showing strength.
“Although inflation has been moderating in recent months, the process of getting inflation down to 2% has a long way to go and is likely to be bumpy,” Powell said in prepared opening remarks, adding that the increases in interest rates are “likely to be higher” than earlier projections.
The sober comments come as the Fed is raising interest rates to their highest levels in years and as the economy – specifically the labor market – is proving more resilient than expected.
Republicans on the Senate Banking Committee largely used the occasion to place blame for the rise in inflation on the Biden administration, citing what they characterized as its opposition to domestic energy production and what South Carolina Republican Tim Scott referred to as a “woke, progressive agenda.”
By contrast, Democrats sought to emphasize the effects of the war in Ukraine, the COVID-19 pandemic and corporate greed as significant contributors to inflation.
As expected, the appearance provided an opportunity to reaffirm the Fed’s commitment to fighting inflation.
In a speech last month in Washington, Powell noted that disinflation had begun but that it had so far been mostly confined to the goods sector of the economy. He said the central bank was looking for more evidence of cooling in the services sector and in items like apartment rents.
Powell also reiterated the job market was still tighter than the Fed wanted, pushing wages higher than is commensurate with its overall target of 2% annual inflation.
More recently, Powell said in the Fed’s monetary policy report issued Friday that “as supply chain bottlenecks have eased, increases in core goods prices slowed considerably in the second half of last year.”
“Within core services prices, housing services inflation has been high, but slowing increases in rents for new tenants in the second half of last year point to lower inflation for housing services in the year ahead,” the Fed noted. “For other services, however, price inflation remains elevated, and prospects for slowing inflation may depend in part on an easing of tight labor market conditions.”
January’s jobs number came in well above expectations, as 517,000 jobs were added, but some of that reflected annual adjustments to the data as well as warmer than normal weather. The Labor Department will report the jobs number for February on Friday with consensus forecasts for a gain of 215,000, though some economists are predicting a higher figure.
Other readings of the economy have come in stronger than anticipated in the first part of the year and while many analysts are still forecasting a recession, the timing has been pushed back.
Powell likes to say the Fed is data-dependent, but the data has been volatile. Better readings on inflation and a slowdown in the pace of economic growth in late 2022 led to a reduction in the amount of interest rate increases in January, but the data since showed stronger levels of consumer spending and retail sales.
Then, inflation data arrived that was worse than forecast. Markets responded with talk of a larger increase in rates when the Fed meets later this month, with some Fed officials saying they would be comfortable with a half-point increase rather than the quarter point that a majority of economists expect.
Dave Gilbertson, vice president at payroll management company UKG, says, “We saw a slight decline in workforce activity in February compared to January consistent with a soft landing in the labor market “
“In general, we’re heading in exactly the direction the Fed is looking for,” Gilbertson says.
Powell has tried to walk a fine line between these expectations, emphasizing that the Fed will do what is necessary without committing to specifics.
Meanwhile, yields on bonds have soared in response to the belief the Fed will raise rates higher and keep them there for longer, with the 10-year Treasury recently breaching the 4% level.
The probability of a recession, especially if delayed until later this year or into 2024 when a presidential election cycle looms, also hovers over the Fed as Powell provides his semiannual testimony to Congress on Tuesday and Wednesday.
Essentially, the Fed is caught in a policy and politics vise of trying to slow inflation enough to be able to say the Fed is meeting its goals without the economy slowing so much it enters a recession. It is a tightrope that is becoming more treacherous as the economy continues to show more resilience than expected given the Fed has raised interest rates from near zero to headed toward 5% in the space of a year.
“The Fed wants to tighten financial conditions so the economy can smoothly transition from the post-pandemic reopening phase – when the economy grew 5.9% in 2021 and 2.1% in 2022 – to a more sustainable rate that neither stokes inflation nor stalls economic growth,” LPL Financial Chief Economist Jeffrey Roach wrote on Monday.
“If the economy can break the back of inflation without a deep and prolonged recession, investors will likely experience markets that could return to lower volatility and improved conditions for both bond and equity investors,” Roach added. “We think the economy will eventually hit its stride, notwithstanding unforeseen global shocks. Hitting that stride may not come until the Fed’s rate hiking campaign is closer to its end, but we expect stock investors to benefit once it does.”
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