Federal Reserve Chair Jerome Powell addressed a town hall meeting and the Economic Club of New York on Thursday, expressing concern over the persistent above-target inflation rates despite their significant decrease from last year. He emphasized that months of encouraging data do not guarantee a sustainable decrease toward the Fed's 2% target, pointing to the uncertainty over future inflation trends.
The Federal Reserve has raised its key rate 11 times since March 2022, lifting it to about 5.4%, its highest level in 22 years. Despite this, Powell did not commit to another interest rate hike this year. However, he underscored adherence to a restrictive policy designed to bring inflation down sustainably, hinting that sustained economic growth might call for more hikes to the benchmark rate.
Contrary to expectations, these measures have not significantly impacted unemployment levels. Powell described this situation as "historically unusual," noting that despite higher borrowing costs, consumers continue spending and employers keep hiring. He also acknowledged significant geopolitical risks to the global economy from conflicts like those in Israel and the Gaza Strip and the aftermath of Russia's invasion of Ukraine.
The Fed's preferred inflation measure, the personal consumption expenditure (PCE) index, fell to 3.5 percent in August. September data is anticipated due to its importance for future monetary policy decisions. However, if inflation remains high due to strong economic growth and labor demand, Powell indicated that further monetary policy tightening might be necessary.
Meanwhile, Treasury bond yields are escalating, with the 10-year yield nearing a 16-year high of 5% and the 30-year yield at 5.1%. High long-term bond interest rates might reduce the need to hike the Fed funds rate according to Lorie Logan, president of the Federal Reserve Bank of Dallas.
Mortgage rates are also climbing, with Freddie Mac reporting the average 30-year rate at 7.63% and the 15-year rate at 6.92%. This has led to a decrease in home sales for four consecutive months as of September. Powell, however, believes that the current restrictive policy exerts adequate downward pressure on economic activity and inflation but warned about potential additional tightening if above-trend growth persists or labor market tightness does not ease.
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