Federal Reserve Chair Jerome Powell worked to maintain the central bank's flexibility on Wednesday, reiterating his view that interest rates are currently constraining and predicting a resumption in the decline of inflation.
However, recent disappointing data on prices and wages have shifted investors' focus towards economic data over the Fed's outlook. Neil Dutta, head of economic research at Renaissance Macro Research, commented, "Powell can say whatever he wants, but ultimately the inflation numbers will dictate what happens."
Despite the Fed's policy statement continuing to suggest a bias towards cutting interest rates rather than raising them, former senior Fed adviser William English suggested that if inflation data remains elevated, the Fed might have to abandon this guidance, potentially leading to rate hikes.
Powell indicated that while he does not foresee a need to resume rate increases, he has not ruled it out, stating, "the data will have to answer that question for us." Some Fed officials are concerned about keeping rates too high for too long, especially with signs of decelerating inflation and wage growth.
There are differing views within the Fed, with some advocating for rate cuts due to concerns about regional banks and industries unprepared for high rates, while others argue for maintaining rates due to a strong economy and the risk of inflation remaining above target.
Powell highlighted factors suggesting that high interest rates are dampening demand, such as a slowdown in hiring. He also expects inflation to decrease, partly due to a slowdown in housing rents.
Eric Rosengren, former president of the Boston Fed, emphasized the importance of monitoring wage growth, stating that if it settles above 4%, progress on inflation could be slower than anticipated. However, Dutta supports Powell's view that lower price pressures are ahead, especially with signs that labor markets are not overheating.
Some economists are concerned that interest-sensitive sectors like housing and manufacturing may have already felt the impact of high rates, potentially leading to sustained growth and inflation. If inflation remains around 3%, Fed officials may consider tightening policy, although Powell indicated that the Fed is not satisfied with 3% inflation.
Overall, the Fed's current stance favoring a rate cut is seen as reasonable, although there is now a possibility that the next move could be towards raising rates.