Federal Reserve Chair Jerome Powell reiterated that the central bank has yet to reach its 2% inflation target on Thursday — and made it clear that the central bank’s historic spree of interest-rate increases isn’t necessarily over.
“If it becomes appropriate to tighten policy further, we will not hesitate to do so,” Powell said during the International Monetary Fund’s policy panel in Washington, DC.
Powell didn’t make an argument for raising rates in the near term. But he said the Fed will closely watch the US economy — on the one hand to avoid hiking rates excessively, and on the other being “misled by a few good months of data.”
“We will keep at it until the job is done,” Powell added of the Fed’s 2% inflation goal, which the US economy hasn’t seen since 2012.
The Fed has raised the benchmark federal-funds rates to a 22-year high so far this year, to a range between 5.25% and 5.5%.
As of the latest policy meeting in November, the sentiment remains the same: One more 25 basis-point hike is possible before year’s end as inflation remains well above the Fed’s target.
“We are making decisions meeting by meeting, based on the totality of the incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks, determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time,” Powell said on Thursday.
Fed officials have said that they are no longer forecasting a recession, though in recent months, data hasn’t always painted a clear picture for economists forecasting the Fed’s next move.
The Consumer Price Index — a key measures of inflation — rose 3.7% in September, nearly double the Fed’s target, and the economy by many measures, including a 3.9% unemployment rate, continues to outperform expectations given the rapid increase in interest rates.
Surprisingly resilient labor market has some worried that inflation could be more stubborn.
Strong hiring can often fuel inflation if companies feel compelled to raise pay to attract and keep workers, making it more difficult for the Fed to reach its 2% inflation target without pushing the benchmark federal funds rate beyond its current range — the highest the US economy has seen since 2001.
Thus, October’s 150,000 payroll gains — a sharp downturn from the blockbuster 336,000 jobs added in September — is a sign that the pace of hiring is losing some momentum without going into a nosedive, which was no doubt welcomed by the Fed.
October’s CPI — a closely-watched measure of inflation that tracks changes in the costs of everyday goods and services — is set to be released on Tuesday, and will be important to central bankers’ upcoming interest-rate decisions at the December policy meeting.
The Fed is hoping to achieve a rare “soft landing,” in which it would manage to slow hiring and growth enough to cool price increases without tipping the world’s largest economy into a recession.
Optimism that this can happen has been growing since inflation has dropped from its 9.1% peak in June 2022, though Powell has remained hawkish about the all-important 2% inflation goal.
Billionaire hedge fund tycoon Ken Griffin doesn’t seem too convinced that such an inflation rate is possible.
At the Bloomberg New Economy Forum in Singapore on Thursday, the 55-year-old Citadel founder warned that elevated inflation rates could linger “for decades” so long as the Russia-Ukraine and Israel-Hamas wars continue and the US government’s deficit remains high.
“We are likely to see higher real rates and we’re likely to see higher nominal rates,” Griffin reiterated at Bloomberg’s forum, which he said the US government clearly didn’t plan for when it “went on the spending spree that created a $33 trillion deficit.”
Griffin — who’s worth a reported $35.5 billion, per Bloomberg estimates — said that US fiscal spending needs to be put in order, as the country is “spending on the government level like a drunken sailor.”
Last month, the US government posted a $1.695 trillion budget deficit in fiscal 2023, a 23% jump from the prior year as revenues fell and outlays for Social Security, Medicare and record-high interest costs on the federal debt rose.
The Treasury Department said the deficit was the largest since a COVID-fueled $2.78 trillion gap in 2021, though President Joe Biden is still asking Congress for $100 billion in new foreign aid and security spending — including $60 billion for Ukraine and $14 billion for Israel — along with funding for US border security and the Indo-Pacific region.
The figure is unsustainable, according to Griffin, and marks a major return to ballooning deficits after back-to-back declines during President Biden’s first two years in office.
The fiscal 2023 deficit would have been $321 billion larger, but was reduced by this amount because the Supreme Court struck down Biden’s student loan forgiveness program as unconstitutional. The ruling forced the Treasury to reverse a pre-emptive charge against fiscal 2022 budget results that increased that year’s deficit.
The fiscal year 2022 deficit was $1.375 trillion.