- Federal Reserve’s Response to High Inflation
- Factors Influencing the Decision
- Challenges in Achieving the 2% Inflation Target
Since inflation is “too high,” the US Federal Reserve chairman said the central bank would raise interest rates “if appropriate.
At an annual central bankers meeting, Jerome Powell said price inflation had decreased.
Nonetheless, it remains above the Fed’s target of 2%.
At the Jackson Hole symposium in Wyoming, Mr. Powell said interest rates could climb further and stay high.
Inflation in the United States reached 3.2% in July, while the key interest rate is 5.25 percent, the highest in 22 years and the result of 11 consecutive rate hikes since early 2022.
Mr. Powell said inflation is still too high, notwithstanding the reduction.
“We are willing to raise rates further if necessary and intend to maintain a restrictive monetary policy until we are confident that inflation is moving sustainably towards our target.”
Mr. Powell said the Fed would “proceed cautiously,” citing Russia’s invasion of Ukraine as a factor in rising world prices.
Food and energy prices “remained volatile” despite headline inflation falling from 9.1% last year.
Mr. Powell also alluded to additional rate hikes in the immediate future as the Fed awaited additional data.
“Unfortunately, a more resilient-than-anticipated economy suggests that higher interest rates may or will be required to cool things sufficiently to reach the 2% inflation target,” said Columbia University economist Cary Leahey.
Mr. Powell stated that there was “considerable additional ground to cover” before reaching the 2% objective.
He added that the Fed intends to “maintain a restrictive policy” – remarks that were widely anticipated by market analysts.
Michael Green, chief investment strategist at Simplify Asset Management, stated, “It’s a reaffirmation that the Fed will proceed slowly and cautiously at best.”
Mr. Powell also mentioned the housing market, where activity had not slowed sufficiently.
“After decelerating sharply over the past 18 months, the housing market is exhibiting signs of a rebound,” he said, adding that this “could justify further tightening of monetary policy.”
Before interest rates could begin to decline, he added, the Fed required a softening in the labor market, where wage growth continued as employers offered higher salaries to attract workers in a diminishing workforce.
Theoretically, greater wages contribute to inflation, extending the need for higher interest rates.
