WASHINGTON (AP) — Jerome Powell delivered a tough message at the start of a news conference Wednesday: Inflation is very highAnd the Federal Reserve is laser-focused on taming it with higher borrowing costs.
However, despite his stern words, the Fed chair said for the first time that the central bank’s actions are already affecting the economy in ways that could slow the worst inflation the country has endured in four decades..
With the Fed’s benchmark interest rate now at a level it believes neither stimulates nor inhibits growth, the pace of rate hikes could slow in the coming months, Powell said. And he pointed to signs that many businesses are having an easier time filling jobs, which could limit wage growth and slow inflation.
“There are some indications that we are closer to the end than the beginning” of the Fed’s efforts to tighten credit, said Michael Feroli, an economist and former Fed staffer at JPMorgan Chase.
Powell’s suggestion that the Fed may moderate its future rate hikes after it announced three quarterly point hikes on Wednesday — the second in a row of that size — helped spark a celebratory rally in the stock market.The S&P 500 jumped 2.6% and the tech-heavy Nasdaq rocketed 4.1%, its biggest gain in two years.
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Some economists do not share the market’s optimism. They noted that Powell left the door open for another big rate hike when the Fed meets next September. Even if the economy slips into recession, the Fed chair has indicated that the central bank will continue to raise rates if it still deems it necessary to curb hyperinflation.
Asked at his news conference if the recession would change the Fed’s rate hikes, Powell said, “We’ll be focused on bringing inflation back down.”
Here are five takeaways from the Fed’s interest rate-setting policy meeting and Powell’s news conference:
Powell: The US is not in recession
Recent statistics indicate that the economy is weakening. Economists are predicting a recession later this year or in 2023. However, Powell pointed to a stronger labor market on Wednesday The economy is not in recession, at least not yet.
Employers added 2.7 million jobs in the first half of the year, the 3.6% US unemployment rate is near a 50-year low and wage growth is strong.
“It doesn’t make sense that the economy could be in recession with this kind of thing,” the Fed chair said.
Jobs over GDP
On Thursday, the government will forecast second-quarter gross domestic product, a broad measure of the country’s output of goods and services. Some economists expect the GDP report to show the economy contracted for a second straight quarter, which meets the unofficial definition of a recession.
But even if it does, the definition of depression is too widely accepted is determined by the National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines a recession as “a significant decline in economic activity that spreads throughout the economy and lasts for more than a few months.”
Powell noted that the government’s estimate of quarterly GDP is often revised significantly later and early reports on economic growth should be taken “with a grain of salt.”
The Fed chair issued a cautionary note, suggesting there are signs of momentum in the job market. Job openings have declined modestly, more people are seeking unemployment benefits, and hiring is lower than it was at the beginning of the year.
Slower growth, better hiring
But even signs of a slightly weaker job market aren’t all bad news, at least from the Fed’s perspective.
The Fed cools the economy through its rate hikes, which make home mortgages, auto loans and business loans more expensive. As consumers and businesses spend less, the reduction in demand will result in inflation closer to the Fed’s 2% annual target.
“We think growth needs to slow, and growth will slow this year,” Powell said.
How high are the rates?
Since the start of this year, the Fed has steadily raised its expectations for how fast and how much it will need to raise rates to beat inflation. On Wednesday, however, Powell said that Fed policymakers’ estimates of a month ago were still the best guide for where rates would go next.
Officials in June expected the Fed’s key rate to reach between 3.25% and 3.5% later this year, which Powell said was a “moderately restrictive” level. And at least two additional rate hikes are expected next year.
The Fed would need a half-point hike in September and two quarter-point hikes in November and December to meet that year-end target. Such increases would represent a more modest pace than the Fed’s now 2.25 percentage point hikes over the past four meetings, the fastest pace since the early 1980s.
The Fed is not alone
Other major central banks around the world have also imposed large rate hikes to combat rising inflation in almost all advanced economies.
The European Union raised its short-term interest rate by half a point last week. Canada’s central bank announced a full percentage point hike Earlier this month. Last month, the Swiss National Bank implemented a half-point hike, First increase in 15 years.
While higher rates around the world can help reduce inflation, they also carry the threat of causing a global economic slowdown.
This week, the International Monetary Fund cut global economic growth to 3.2% this year. That’s down from an estimate of 3.6% in April and much slower than last year’s 6.1% pace.