Federal Reserve Chair Jay Powell delivered a speech on Friday, acknowledging that inflation remains high and suggesting the possibility of further interest rate increases if price pressures persist. Powell emphasized the central bank’s commitment to a “restrictive” policy as it navigates the final stages of its campaign to combat the worst inflation shock in decades. The immediate market response to Powell’s comments included a rise in the yield on the US two-year bond and little change in the benchmark 10-year US Treasury, as well as a slight increase in the S&P 500 stock market.
Despite the previous rate hikes, Powell expressed that the full effects have not yet materialized and cautioned about the upside risks to inflation. He stated that evidence of persistently above-trend growth may necessitate further tightening of monetary policy. The Fed now faces the challenge of assessing whether further rate hikes are necessary and determining the duration of elevated rates before considering any cuts. It is expected that the Fed will hold off on raising interest rates at its next policy meeting in September, with some anticipating a final quarter-point increase in late October and rate cuts not likely until 2024.
Powell’s warning comes at a tense moment for financial markets, which have struggled to adapt to recent increases in US borrowing costs. The debate surrounding immediate policy actions remains unsettled, but the consensus among officials is that achieving the Fed’s 2% inflation target will be a gradual process requiring an extended period of higher benchmark rates. Economists attribute this “higher-for-longer” approach to factors such as stronger-than-expected growth, increasing government deficits, and investments in domestic manufacturing and green technology, which have contributed to sustained borrowing costs. Powell acknowledged uncertainty regarding the precise level of monetary policy restraint due to the inability to identify the neutral rate of interest with certainty.