Jay Powell warns inflation ‘too high’ in Jackson Hole speech

Jay Powell has warned that inflation “remains too high”, raising the prospect of further interest rate increases in the world’s largest economy should price pressures persist.

In a highly anticipated speech on Friday, the chair of the US Federal Reserve at times struck a hawkish tone, pointing to the central bank’s readiness to maintain a “restrictive” policy to bring inflation down to its 2 per cent target.

“Although inflation has moved down from its peak — a welcome development — it remains too high,” Powell said at the Fed’s annual economic symposium in Jackson Hole, Wyoming.

“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” he added.

But he tempered that message with a pledge to proceed “carefully” as the Fed navigates the final stages of its campaign to stamp out the worst inflation shock in decades.

Headline US inflation, according to the consumer price index, was 3.2 per cent for July, well down from its peak of 9.1 per cent, but above June’s rate of 3 per cent.

Powell said the Fed was now focused not only on the risk of tightening monetary policy too little and allowing inflation to become entrenched but also of raising rates too high. “Doing too much could also do unnecessary harm to the economy,” he said.

The two-year Treasury yield, which is sensitive to changes in interest rate expectations, rose 0.05 percentage points to 5.07 per cent following Powell’s remarks, while the benchmark 10-year US Treasury yield added 0.01 percentage points to 4.25 per cent.

Equities swung between small gains and losses, with the S&P 500 stock index up 0.3 per cent just after midday and the Nasdaq Composite also 0.3 per cent higher.

“I think the Fed is very happy with the set-up that they have right now,” said Eric Winograd, director of developed market economic research at AllianceBernstein. “They have maximum flexibility.”

Since March 2022 the Fed has lifted its benchmark policy rate from near zero to a range of 5.25 per cent to 5.5 per cent, a level that Powell on Friday said would be “restrictive” on growth, the labour market and inflation.

While Powell said the full effects of past rate rises had not yet materialised and probably meant “significant further drag in the pipeline”, he said the Fed was focused on the upside risk to inflation. He cautioned that additional evidence of persistently strong growth could jeopardise progress on getting inflation down and “warrant further tightening of monetary policy”.

The Fed faces a difficult task in the coming months. First officials must decide whether they need to raise the benchmark policy rate beyond the current 22-year high. Then it needs to work out how long to keep rates elevated before implementing any cuts.

The central bank is widely expected to forgo another rise in interest rates at its next policy meeting in September. Some market participants are anticipating a final quarter-point increase at its meeting in late October, but it has not been fully priced in. Rate cuts are not expected until well into 2024.

John Roberts, who worked for 35 years at the Fed, said he expected the central bank to skip a September rate rise and then reassess at later meetings.

“If core inflation is around 3.5 per cent by December, then I think they will never pull the trigger [on another increase],” said Roberts, now a senior adviser at Evercore ISI. Core inflation, according to the Fed’s preferred personal consumption expenditures index, hovered at 4.1 per cent as of June.

Powell’s warning on Friday comes at a fraught moment for financial markets, which have recently struggled to digest a recent surge in US borrowing costs. Once adjusted for inflation, the “real” yield on the 10-year Treasury note is at its highest point in more than a decade. Mortgage rates have also soared.

While there is a lively debate over whether more rate rises will be needed, officials are more unified in their view that hitting the inflation target will take some time, requiring the Fed to keep monetary policy tight.

“The broader suite of data has proven to the market to be much more resilient than anticipated — that’s opening up the door to the Fed holding policy rates higher for longer,” said Meghan Swiber, US rates strategist for BofA Global Research.

Additional reporting by Philip Stafford in London