Federal Reserve Chairman Jerome Powell made statements about the economic outlook at the New York Economic Club. Powell pointed out that the U.S. economy is still strong, but stated that the Fed could further raise interest rates during a time when it’s difficult to find a job.
According to Powell, it’s important to pay attention to the latest data that demonstrates the resilience of economic growth and labor demand. There might be a need to tighten monetary policy even more.
“We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
Inflation at Its Peak
Powell indicated that the inflation data for September continued its downward trend, but this data isn’t very encouraging. The annual inflation, which peaked over 9%, has declined to 3.7%; however, it’s still above the Fed’s 2% target.
The Federal Reserve Chairman stated that for inflation to return to the Fed’s 2% target in a sustainable manner, certain conditions might be required. Among these conditions, there could be a period of growth below the trend and a softening in labor market conditions.
According to the Fed Chairman, even though steady progress has been made in reducing inflation, the fight is not over yet; the possibility of further interest rate hikes continues, and tight monetary conditions are expected to persist.
Comments on the Labor Market and Bond Yields…
Powell mentioned that the labor market is tight and he believes that high bond yields are not resulting from high inflation expectations or anticipated interest rate hikes.
“Persistent changes in financial conditions can have implications for the path of monetary policy,” Powell said, with higher market-based interest rates, if sustained, doing the same job as Fed rate increases.
War Brings Back a Set of Uncertainties
Pointing out the extreme increase in geopolitical tension, Powell stated that this situation poses a fundamental risk. In particular, attacks by Hamas on Israel entail new geopolitical risks for the economy. Powell said they are monitoring these developments in terms of their economic consequences, but the impact of these developments is not yet visible.
“Our institutional role at the Federal Reserve is to monitor these developments for their economic implications, which remain highly uncertain. Speaking for myself, I found the attack on Israel horrifying, as is the prospect for more loss of innocent lives.”
Since the Fed began raising interest rates in March 2022, the unemployment rate has remained at the current 3.8%, and the overall economic growth had been trending above the 1.8% annual growth rate observed by Fed officials. However, Powell highlighted that there are a series of new “uncertainties and risks.”