Fed’s Powell says inflation battle not won, more rate hikes to come

By Howard Schneider, Ann Saphir and Michael S. Derby

WASHINGTON (Reuters) – The Federal Reserve will offer more interest rate hikes next year even as the economy slides into a possible recession, Fed Chairman Jerome Powell said Wednesday, arguing a higher cost would be paid if the bank central US does not get a firmer grip on inflation.

Recent signs of slowing inflation have yet to bring any confidence that the fight has been won, Powell told reporters after the Fed’s policy-making committee raised the benchmark overnight interest rate by half a percentage point and he predicted it will continue to rise above 5% in 2023, a level not seen since the sharp economic recession of 2007.

Such increases in borrowing costs would come despite an economy that Fed officials projected to operate at near-stall speed through next year, with an annual growth rate of 0.5% and an unemployment rate nearly one percentage point by the end of 2023, well above the increase historically associated with a recession.

“We don’t talk about this kind of recession, about that kind of recession. We just make these predictions,” Powell said at a news conference. “I wish there was a completely painless way to restore price stability. There isn’t, and that’s the best we can do.”

He described the slow rate of economic growth outlined by Fed officials next year as still “modest.”

“I don’t think that would qualify as a recession… This is positive growth,” the Fed chief said, although “it won’t look like a boom.”

But other aspects of the Fed’s projections, notably an increase in the unemployment rate to 4.6% from its current 3.7%, are consistent with an ongoing decline as the central bank keeps its key rate at a “level restrictive” for at least the next two years.

Wednesday’s rate hike, approved unanimously by Fed policymakers and widely expected by financial markets, lifted the target policy rate to the 4.25%-4.50% range, with officials expecting it to rise to somewhere between 5.00% and 5.25% next year.

If anything, the bias is greater: seven of 19 policymakers have predicted that even higher rates will be needed, and US central bankers are unanimous that the risks are tilted towards higher-than-expected inflation rather than a surprise in the opposite direction.

However, Powell said, reiterating the hard line on enforcement of the Fed’s 2% inflation target that he developed over the year, “the greatest amount of pain, the worst pain, would come from a failure to raise rates high enough and by us allowing inflation to take root.”

“The new economic projections imply an even higher pain threshold than before” for a Fed willing to tolerate the equivalent of about 1.6 million job losses, wrote Aneta Markowska, chief financial economist at Jefferies. “This suggests that hawks still outnumber doves by a significant margin.”

Even with recent improvements, the Fed’s preferred measure of inflation remains about three times the central bank’s target, and authorities expect it will take at least three years to roll back.

Only two of 19 Fed officials see the benchmark overnight interest rate remaining below 5% next year, a sign of still broad consensus to lean against inflation.

The Fed’s message on Wednesday also leaned on market expectations that recent data showing slowing inflation could push the central bank off its hawkish path and prompt policymakers to cut rates before the end of next year. year.

“Let markets feel that is the key to fixing financial conditions” that have eased in recent months as inflation data improved, a move counterproductive to the Fed’s inflation-fighting strategy, Carl Riccadonna said , chief US economist at BNP Paribas.

‘QUITE RESTRICTIVE’

The new statement came after a policy meeting in which officials pared back the three-quarters of a percentage point rate hikes given in the past four meetings.

US stocks closed lower on Wednesday. In the US Treasury market, which plays a key role in transmitting Fed policy decisions to the real economy, yields were reduced slightly. The dollar fell against a basket of currencies.

“Taken together, today’s statement and economic projections tell a simple but persuasive story: This Fed is not willing to pivot in any meaningful way until it sees sustained and conclusive evidence of a reversal in economic pressures. inflationary trends,” said Karl Schamotta, chief market strategist at Corpay.

Powell said the speed of upcoming rate hikes is less critical now than earlier this year, when the central bank was “frontloading” rate hikes to catch up with accelerating prices.

“It’s not so important how fast we go,” he said, noting that the biggest question policymakers face is finding an “appropriately restrictive” endpoint and determining how long to stay there.

“Our focus right now is really to shift our policy stance to be tight enough to ensure inflation returns to our 2% target over time, not on rate cuts,” Powell said.

“Inflation data received so far in October and November show a welcome reduction in the pace of price increases, but it will take much more evidence to give confidence that inflation is on a sustained downward path,” Powell said.

(Reporting by Howard Schneider and Ann Saphir; Additional reporting by Lindsay Dunsmuir, Michael S. Derby and Saqib Ahmed; Editing by Andrea Ricci and Paul Simao)

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