Federal Reserve Monitoring Economic Data for Potential Rate Hikes

Federal Reserve Chairman Jerome Powell emphasized the central bank’s attentiveness to recent economic data indicating strong growth and labor demands. In his remarks to the Economic Club of New York, Powell acknowledged that persistent above-trend growth or a halt in labor market progress could jeopardize inflation levels, potentially leading to further tightening of monetary policy.

Recognizing the presence of both known and unknown uncertainties, the Fed is cautiously seeking to strike a balance between raising interest rates too high and maintaining them at levels that effectively combat inflation. Powell also highlighted the Fed’s vigilance in monitoring financial conditions, particularly in relation to the recent surge in longer-term bond yields.

Over the past 19 months, the Fed has consistently raised interest rates to a range of 5.25%-5.5%. However, Powell acknowledged that the restrictive stance of current policies is exerting downward pressure on economic activity and inflation. As a consequence, there may be a slowdown in the economy in the upcoming months due to the cumulative impact of these rapid rate hikes.

Given the swift pace of tightening, Powell cautioned that there could still be additional tightening in the future. As economic data continues to demonstrate resilience and labor demands persist, further rate hikes may be necessary to maintain stability and manage potential inflation risks.

Recent Data

In a comprehensive review of recent economic data, Powell echoed sentiments expressed by his colleagues at the central bank in their recent speeches. Notably, Powell commended the decline in inflation over the summer, a trend that has persisted in the September reports, although he acknowledged that these latest data points were somewhat less encouraging.

According to Powell, the Federal Reserve staff has projected a continued softening of core inflation as measured by the personal consumption expenditure index in September. However, this data is not set to be released until next week.

Despite the positive developments in inflation, Powell emphasized that it remains elevated and highlighted that a few months of favorable data are merely the initial steps towards bringing inflation back to the desired 2% target.

Powell maintained his stance on the job market, stating that it is showing signs of slowing down despite the substantial increase in payrolls observed in September. Survey results indicate that consumers believe the labor market has returned to pre-pandemic levels of tightness.

In terms of economic growth, Powell noted that it has consistently exceeded expectations throughout the year. This includes the robust performance of retail sales, which recorded stronger-than-forecast gains last week.

Looking ahead, forecasters anticipate strong gross domestic product (GDP) figures for the third quarter, with expectations of a cooling off in the fourth quarter and the subsequent year.