Federal Reserve Board Chair Jerome Powell speaks in Washington, on Nov. 1.KEVIN LAMARQUE/Reuters
U.S. Federal Reserve officials “are not confident” that interest rates are yet high enough to finish the battle with inflation, and may be nearing the end of how much help they can expect in lowering price pressures from improvements in the supply of goods, services and labour, U.S. Fed Chair Jerome Powell said on Thursday.
In comments more significant in flagging some of the Fed chair’s emerging views about structural economic changes following the pandemic, Mr. Powell said the Fed “is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 per cent over time; We are not confident that we have achieved such a stance.”
“If it becomes appropriate to tighten policy further, we will not hesitate to do so,” Mr. Powell said in remarks prepared for delivery to an International Monetary Fund research conference, while adding that further policy moves would be conducted “carefully … allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening. We are making decisions meeting by meeting.”
The fight to restore price stability “has a long way to go,” the Fed chair said.
While Mr. Powell’s remarks about the immediate policy outlook did not go much beyond those given after the Fed’s Oct. 31 – Nov. 1 meeting, when policy makers held the benchmark interest rate steady in the range of 5.25 per cent to 5.5 per cent, they did delve into the Fed chair’s views about how the final phase of the inflation battle may unfold – with more “disinflation” possibly having to come from an economic slowdown.
The progress on inflation to date has been relatively cost free in terms of lost jobs or rising unemployment, helped along by an easing of the supply chain problems that developed during the pandemic as well as an unexpected rise in the number of people available to take jobs.
But “it is not clear how much more will be achieved by additional supply-side improvements,” Mr. Powell said, a development that could mark the end of those relatively pain-free gains in lowering inflation.
Going forward, “it may be that a greater share of the progress in reducing inflation will have to come from tight monetary policy restraining the growth of aggregate demand,” Mr. Powell said.
Over a longer term, he said, the Fed may also be less able than in the past to ignore supply shocks as a source of persistent price increases, with the pandemic experience showing that “it can be challenging to disentangle supply shocks from demand shocks in real time, and also to determine how long either will persist.”
Mr. Powell said that could mean policy makers in the future are more likely to react to supply-driven price increases than they might have otherwise, given the tendency to “look through” many supply problems as likely short-lived in a dynamic economy.
“Supply shocks that have a persistent effect on potential output could call for restrictive policy to better align aggregate demand with the suppressed level of aggregate supply,” he said. “The sequence of shocks to global supply chains experienced from 2020 to 2022 suppressed output for a considerable time and may have persistently altered global supply dynamics.”
On another key structural question, Mr. Powell said it was “too soon” to know if the low and falling interest rate world that characterized the decades before the pandemic were gone for good, but that would be a focus of the Fed’s next framework review, to begin late next year.