Federal Reserve Chair Jerome Powell sought to maintain the central bank’s flexibility on Wednesday by reiterating his belief that interest rates are restrictive and that inflation is likely to resume its decline. However, a series of disappointing reports on prices and wages have led investors to focus less on the Fed's outlook and more on upcoming economic data.
Neil Dutta, head of economic research at Renaissance Macro Research, noted, “Powell can say whatever he wants, but ultimately the inflation numbers will dictate what happens.” The Fed's policy statement maintained a bias towards easing, suggesting a rate cut was more probable than an increase. But William English, a former senior Fed adviser, suggested that if inflation continued to rise, the Fed might have to abandon this guidance, potentially opening the door to rate hikes.
Powell indicated that while he didn't foresee a need to resume rate increases, he didn't rule out the possibility, stating, “In terms of the peak rate, I think…the data will have to answer that question for us.” Internally, some Fed officials are concerned about leaving rates high for too long, while others believe the economy is strong enough to warrant no rate cuts this year, particularly as inflation remains a concern.
Powell cited several reasons for believing that high interest rates were cooling demand, including a slowdown in hiring and a decrease in the share of workers quitting their jobs. He also expressed expectations for a decline in inflation, partly due to the lagging effects of a slowdown in housing rents.
Eric Rosengren, former president of the Boston Fed, emphasized the importance of watching wage growth, stating, “To get sustained inflation, there has to be something generating that, and right now, there’s not an obvious area that is overheated and that is generating the likelihood of prices and wages going up.”
Some economists worry that interest-sensitive sectors such as housing and manufacturing may have already felt the impact of the Fed’s rate policies, potentially leading to sustained growth that prevents inflation from decreasing significantly.
Looking ahead, if inflation remains around 3%, officials could face tough decisions on whether to tighten policy. Powell declined to discuss whether rate increases were on the table, emphasizing that the Fed would hold off on rate cuts if inflation proves “more persistent than expected.” He also dismissed the idea that the Fed would be content with 3% inflation, stating, “Of course we’re not satisfied with 3% inflation.”
Overall, while the Fed currently sees a rate cut as more likely than an increase, English noted that there is a real possibility that the next move could be towards raising rates, though he personally believes that raising rates today is not warranted.