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Combined, the uncertainty puts the Fed in a position to probably hold off on another rate hike when convene in a few weeks.
“It may just be that rates haven’t been high enough for long enough,” Powell said in a discussion following his prepared speech.
The Fed has moved aggressively to raise interest rates over the past year and a half. Looking ahead, Powell said the Fed is “proceeding carefully” and would make its decisions based “on the totality of the incoming data, the evolving outlook and the balance of risks.” That sentiment has been echoed by other Fed officials this week, cementing expectations for no rate hike before the Oct. 31-Nov. 1 policy meeting.
Still, no one knows what happens from here. The Fed could raise rates further, or hold them higher for longer, if it isn’t seeing enough cooling on jobs, hiring or growth. But Powell noted that households and businesses haven’t responded to high borrowing costs in typical ways.
He pointed to homeowners who locked in low mortgage rates, and therefore aren’t affected by the run-up in borrowing costs as they soared past 7 percent. Powell also mentioned businesses that have termed out their debt and now aren’t feeling tighter financial conditions.
“It really is a story of much stronger demand,” Powell said. “There may be some ways the economy is less affected by interest rates. It’s hard to know precisely.”
The list of uncertainties goes on. Officials aren’t yet sure how long inflation will continue to ease, or where prices will settle over the coming months. The Fed also sprinted to raise interest rates over the past 18 months, and no one knows how long it will take for the financial markets, households and businesses to feel the full consequences.
Geopolitical tensions are also running high, with unknown risks for the world economy. Last year, Russia’s invasion of Ukraine roiled international energy markets and sent inflation soaring. And, now, turmoil in the Middle East adds even more instability. Powell said that he found this month’s attack on Israel by Hamas “horrifying, as is the prospect for more loss of innocent lives.”
(As an added twist, climate demonstrators delayed Powell’s luncheon speech, Bloomberg first reported, causing Powell to temporarily leave the ballroom.
Powell’s remarks come as policymakers are navigating yet another confusing phase of the pandemic economy. Against the odds, the economy has remained remarkably resilient in the face of the Fed’s moves to hoist interest rates to the highest level in 22 years. The job market is still churning. Consumers are still spending. And Fed officials expect the economy will grow at a modest clip this year.
Typically, those signs of strength would be welcome news for top policymakers and households alike. But higher-than-normal prices still pulse through the economy, and in order for the Fed to win its inflation fight, it needs to see gross domestic product and hiring slow to a more sustainable pace. If not, Fed officials warn they’ll have to keep a firmer grip on the economy for longer than they currently expect.
“I think the evidence is that policy is not too tight right now,” Powell said.
Much depends on how the economy evolves. But already, it’s clear that the recession that was so widely expected just one year ago isn’t materializing. Retail sales for September jumped 0.7 percent from the month before, far surpassing expectations. Inflation has also cooled from last year’s peak of 9.1 percent, notching 3.7 percent last month. That’s still above the Fed’s 2 percent target, but marked progress considering the economy hasn’t ground to a halt in the meantime.
The labor market posted massive gains in September, with employers adding 336,000 jobs. But Powell ticked through signs that the ultrahot labor market is gradually cooling off. There used to be two jobs open for every person looking for work; now that figure is 1.4. Businesses are having an easier time hiring workers. And wage growth is simmering closer to more normal levels, Powell said.
Looming over the Fed’s policy dates is the open question of what it will take to get the economy to slow down. Interest rates are a blunt tool and affect certain parts of the economy more directly than others.
In a discussion with the Real Estate Roundtable on Tuesday, Richmond Fed President Tom Barkin said it can be hard to tame consumer spending with higher rates, since many wealthier consumers just don’t feel the sting.
“There’s no question that it’s harder to get inflation under control when you have a bunch of wealthy consumers who didn’t spend during covid who maybe have changed their mind-set toward what spending looks like in the future, whose equity values are up 40 percent, whose home values are up 40 percent, and who really like Beyoncé and Taylor Swift,” Barkin said.
What that means for monetary policy, though, is somewhat unclear. The Fed’s base policy rate, known as the federal funds rate, currently falls between 5.25 and 5.5 percent. Fed officials have left the door open for another small, quarter-point rate hike before the end of the year, based on what they’re seeing in the economy. But so far, there hasn’t been a major push for another hike when officials convene in a few weeks, potentially punting a final rate hike to the Fed’s December meeting.
Part of the reason Fed officials might hold rates steady is because of uncertainty in the financial markets. Yields on government bonds have shot up, especially the 10-year Treasury, a crucial benchmark that buttresses borrowing rates worldwide. Some Fed officials have hinted that higher yields could effectively do the job of one more rate hike.
“If term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening,” Lorie Logan, president of the Dallas Fed, said earlier this month.
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