Federal Reserve Chairman Jerome Powell expects “significant declines” in U.S. inflation in 2023, but he also said a surprisingly strong jobs report in January underscores the need to keep raising interest rates.
“We think we need to do further rate increases,” Powell said in an interview Tuesday at the Economic Club of Washington. “And we think that we’ll need to hold policy at a restrictive level for a period of time.”
Wall Street economists say Powell largely stuck to his prior script that the Fed was making progress in its fight against inflation, but there is more work to do.”
“January’s jobs data didn’t really change Chair Powell’s message,” said chief economist Bill Adams of Comerica. “The important takeaway is that Powell had a chance to signal a shift to a more aggressive posture and he didn’t take it.”
Several other senior officials at the Fed, on the other hand, said this week the central bank might need to raise interest rates somewhat higher to help subdue inflation in the wake of the January jobs report.
The U.S. gained an estimated 517,000 jobs last month, defying expectations of a big slowdown in employment. The unemployment rate fell to a nearly 54-year low of 3.4%.
The Fed has been raising interest rates to bring down high inflation, a strategy that rests in part in slowing the economy enough to cool off the labor market.
Senior Fed officials worry a shortage of labor will continue to drive up worker pay and add to inflation pressures, making it harder to get prices back under control.
After the Fed raised interest rates again last week, Powell said the central bank was only likely to do so a “couple more times.”
His comments came after a firmer statement put out by the bank after the policy rate hike last week. Critics said his more dovish comments at the press conference after the policy meeting were counterproductive, giving the signal the Fed wasn’t willing to raise rates as high as necessary to tame inflation.
Read: Powell delivered ‘most counterproductive press conference’ in memory: Larry Lindsey
Yet Powell repeatedly stressed in the interview Tuesday that the Fed was committed to getting inflation back down to pre-pandemic levels of 2% or less.
The annual rate of inflation, using the consumer price index, jumped to a 40-year high of 9.1% last summer before tapering off to 6.5% by the end of the year.
Prodded several times on whether the Fed would be OK with a stable 3% inflation rate, the chairman stuck to the 2% goal.
“That’s just not something we are looking to change. It’s not going to change,” he said. Powell said the rate of inflation should drop back down to around 2% by 2024.
U.S. stock markets
DJIA,
SPX,
see-sawed after Powell’s interview.
If Powell is right, the Fed might not have to raise its benchmark interest rate well above the central bank’s current projection of 5% to 5.25%.
After last week’s rate hike, the so-called fed funds rate stood at 4.5% to 4.75%. It would take just two more rate hikes to get to the Fed’s target.
In the wide-ranging interview, Powell admitted the January jobs report was surprisingly robust. “It was certainly stronger than anyone I know expected.”
His biggest worry, Powell said, was the rate of inflation in services minus housing — what some economists have taken to calling “super core inflation.”
That figure tends to best reflect the impact of higher wages on inflation. “it’s not really showing any disinflation,” Powell said.
Powell said the demand for workers is 5 million higher than the number of people looking for work, a labor shortage that is unlikely to ease much anytime soon.
As for the Fed’s $8.4 trillion balance sheet, Powell said it’s likely to take a couple of years to reduce it to a level the bank is comfortable with. He did not specify a particular level.
The balance sheet exploded after the pandemic when the Fed bought trillions of dollars worth of U.S. Treasurys and mortgage-backed bonds to try to prop up the economy. Critics say the strategy contributed to high inflation.