Federal Reserve Chair Jerome Powell speaks during a news conference at the William McChesney Martin Jr. Federal Reserve Board Building following a Federal Open Market Committee meeting on July 26, in Washington.Nathan Howard/The Associated Press
The U.S. Federal Reserve signalled Wednesday that a month of impressive inflation data isn’t enough to sway it from its path to higher interest rates. But a summer of impressive data just might.
“It’s only one report, one month’s data,” Fed chairman Jerome Powell told a news conference, minutes after the Fed raised its benchmark federal funds rate target to a range of 5.25 per cent to 5.5 per cent, a 22-year high. Mr. Powell was talking about the June consumer price index (CPI) report that came out two weeks ago, showing that the U.S. inflation rate had tumbled to a 27-month low of just 3.0 per cent, from 4.0 per cent in May.
Mr. Powell’s message is that he and his colleagues haven’t yet seen enough to be persuaded that inflation can return to the Fed’s 2-per-cent objective without further rate increases. After pausing rate hikes six weeks ago to take a breather and watch the data – and seeing sharply slowing inflation and a cooling of the labour market in those intervening weeks – the monetary policy makers decided they should raise rates again anyway, before sitting back for the rest of the summer to see how things play out.
“It’s really dependent so much on the data. And we just don’t have it yet,” Mr. Powell said.
But by the time the Fed’s decision-makers get back to work in September, the data will have plenty of chances to change their minds.
As Mr. Powell was quick to point out – unprompted – in his post-announcement news conference Wednesday, the Fed will receive two more monthly CPI reports between now and its next rate-setting meeting on Sept. 20. It will also receive two more monthly employment reports.
By Sept. 20, the Fed will have a much more complete picture than it does now. And perhaps, Mr. Powell allowed, a path to halt rate increases.
“I would say it is certainly possible that we would raise again at the September meeting, if the data warranted. I would also say that it’s possible that we would choose to hold steady at that meeting.”
For beleaguered Americans witnessing another step upward in the Fed’s 16-month campaign of inflation-fighting rate increases, that’s not much to go on. Indeed, the statement accompanying Wednesday’s quarter-percentage-point rate hike gave little sense that the end is near; it said the Fed is still “determining the extent of additional policy firming that may be appropriate.” In June, Fed officials signalled that they still expected to raise rates twice before the end of the year, and the near-identical language in Wednesday’s statement suggested that this remains the Fed’s position.
Still, Mr. Powell’s comments offered some glimmers that he and his colleagues are no longer so full speed ahead on further rate hikes as they were even a few weeks ago.
“I do think it makes all the sense in the world to slow down, as we now make these finely judged decisions,” Mr. Powell said, responding to a reporter’s question about whether the Fed would at least take longer breaks between future rate hikes.
He also spent considerable time talking about the prospects for the Fed to begin cutting rates next year – something that the Fed’s updated forecasts pointed to in June.
“We’ll be comfortable cutting rates when we’re comfortable cutting rates,” he said. “That won’t be this year, I don’t think. But many people [on the Fed’s policy-setting committee] wrote down rate cuts for next year. … That’s just going to be a judgment that we have to make then, a full year from now.”
“If we see inflation coming down – credibly, sustainably – then we don’t need to be at a restrictive level any more. We can move back to a neutral level,” he said. “You’d stop raising [rates] long before you got to 2-per-cent inflation, and you’d start cutting before you got to 2-per-cent inflation, too.”
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Importantly, Mr. Powell sounded like a Fed chair who is increasingly concerned about overdoing his inflation fight – about crossing over the point where the disinflationary benefits of high rates are outweighed by the damage those rates inflict on borrowers and the broader economy.
“It’s really a question of, how do you balance the two risks: the risk of doing too much or doing too little. I would say that we’re coming to a place where there really are risks on both sides. It’s hard to say, exactly, whether they’re in balance or not.”
It’s that balance that, increasingly, will dictate how far monetary policy makers can push their inflation fight – not just at the Fed, but at other central banks, too, including here in Canada. The summary of the Bank of Canada’s July rate-decision meeting, published Wednesday, showed that the risks of too much versus too little were a big part of the discussion leading up to the rate hike.
It’s as strong a sign as any that the end is approaching for this extraordinary cycle of rate increases – because it’s a question that’s fundamental to determining the point where rates have done all they can do to tame inflation.
As both the Fed and the Bank of Canada are increasingly discussing, we’re very near the tipping point. The rest of the summer could well determine if we’re there.