Fed to keep the current target rates in September, but the door remains half-open for a further potential hike
During his speech at Jackson Hole, the Chairman of the Federal Reserve, Jerome Powell, underscored the Fed’s commitment to achieving and maintaining a 2% inflation rate.
He delved into the complexities of inflation, identifying the major factors, and highlighted non-energy and non-housing services, which have been persistently challenging due to higher labor costs in a demanding job market.
Powell hinted that measures to stabilize prices are imminent, and he hopes that by implementing a „restrictive monetary policy„, the market imbalances will be corrected.
Throughout his address, Powell used the term “restrictive” in relation to monetary policy seven times. He acknowledged the implications of increased borrowing costs and stricter lending conditions, both of which would decelerate the economy and gradually reduce inflation to the target 2%.
″My remarks this year will be a bit longer, but the message is the same: It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so. We have tightened policy significantly over the past year. Although inflation has moved down from its peak—a welcome development—it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,″ said Jerome Powell at Jackson Hole economic symposium.
However, he voiced concerns that the economy might not be slowing as predicted, suggesting a possible need for an even tighter monetary stance.
He further stated that the Fed stands ready to increase rates if needed and will maintain a restrictive position until there’s confidence that inflation is on a consistent downward trajectory.
Although monetary policies are likely to remain stringent, Powell acknowledged the unpredictable lag between policy enforcement and its tangible effects.
The existing real interest rates, being notably higher than typical estimates for a neutral policy, signify the Fed’s hesitancy to over-tighten.
This sentiment was mirrored in the July FOMC meeting minutes, where the balancing act between over and under-tightening was discussed.
Concluding his address, Powell suggested that the Federal Reserve is inclined to maintain the current 5.25-5.5% target range for the Fed funds in the upcoming September meeting.
However, considering the current job market scenario and robust third-quarter activity, the possibility of another rate increase before the year ends is on the table.
Despite this, it’s anticipated that the previously forecasted 100bp rate cuts for 2024 will be revised.
From another perspective, while rate hikes have probably reached their zenith, rate reductions are expected in 2024. Factors such as soaring borrowing costs, impacting mortgages, credit cards, and personal loans, combined with limited credit availability and the depletion of pandemic-era savings, are likely to tighten the financial grip further.
Though the U.S. economy may grow over 3% in the present quarter, a subdued performance is foreseen for the final quarter, accompanied by notable advancements in reducing inflation. We anticipate interest rate reductions in 2024 as monetary policies transition to a more balanced stance.
Article based on a story from ING Bank as copyright owner