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Jerome Powell speech: Fed chair’s words could offer rate hike clues – USA TODAY

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The Federal Reserve is committed to bringing inflation down to its 2% goal, which means interest rates will continue to rise, Federal Reserve Chairman Jerome Powell said in a speech at a conference on Friday. But by how much more will depend on incoming data, he said. 

Since the Fed’s policy-making arm last met in July, the Fed has seen some encouraging signs inflation is easing. July’s consumer price index rose an annual 8.5%, off the blistering pace of 9.1% in June. And this morning, the Fed’s preferred inflation gauge – the personal consumption expenditures price index – showed a year-over-year rise of 6.3% in July, down from 6.8% in June. 

But Powell emphasized that one month isn’t a trend, and that the labor market continues to be very strong. Higher interest rates, slower growth, and softer labor market conditions would bring down inflation. 

“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” he said. 

Before the September meeting, the Fed will get another month’s worth of data. August’s consumer price index is due on Sept. 13 and the monthly jobs report on Sept. 2. 

Impact on your wallet: Fed’s trying to halt inflation with big rate hikes. How this affects debt, stocks, savings

Will the Fed ever cut interest rates? 

Probably not any time soon. The Fed hasn’t even moved the fed funds rate above its “neutral rate” yet, which it has said needs to happen. Fed members’ June forecasts showed the median federal funds rate running slightly below 4% through the end of 2023, and it’s currently only between 2.25% and 2.5%. 

Further, once fed funds rate is at a level the Fed deems appropriately restrictive, “restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said.  

“The historical record cautions strongly against prematurely loosening policy,” he added. 

When will the Fed stop raising rates? 

All decisions will depend on incoming data and the outlook but it likely isn’t any time soon with inflation running far above the Fed’s 2% goal and the labor market still extremely strong. 

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” he said.  

He expects the fed funds rate will have to move above its so-called neutral rate – when rates are neither very restrictive nor too loose to fuel an overheated economy – to get inflation under control. In the Fed’s last economic projections in June, it saw the long-term fed funds rate at 2.5%. The fed funds rate range is currently between 2.25% and 2.5%. 

But “at some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases,” he said.  

– Medora Lee

Hawkish Fed meaning  

Powell’s speech struck a hawkish tone, meaning the Fed will continue to be hyper-focused on getting inflation under control by increasing rate hikes.  

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” 

Some hoped for a more dovish tone, in which Powell likely would have acknowledged the pain rate hikes have caused families and promised relief iin the form of less aggressive rate hikes. But with inflation still hovering near 40-year highs, Powell said he doesn’t think it’s appropriate to back off now.  

– Elisabeth Buchwald

Will the Fed go big again? 

At the last meeting in July of the Fed’s policy-making committee, the Fed raised its short-term benchmark fed funds rate by 75 basis points. It was the second such mega rate hike in a row, and at the time, Powell said another unusually large increase could be appropriate at its next meeting in September.  

This morning, Powell said “our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook,” Powell said.  

But investors will note consumer inflation may have slowed in July from June, but inflation is more widespread. Prices aren’t just rising in select parts of the economy anymore. They’re happening in almost every sector, including rent, food, energy and medical services.

Also, the labor market remains extremely strong, with employers adding a robust 528,000 jobs last month. Along with that, wage growth surged, meaning wages will likely keep inflation elevated. Average hourly earnings jumped 0.5% for the month and 5.2% from a year ago.

– Medora Lee

Stock Market reaction 

 After opening little changed ahead of Powell’s speech, stocks turned negative as the Fed Chair did not indicate that the central bank would back off rate hikes any time soon.  

The Nasdaq Composite dropped by 241 points, or 1.8%. The S&P 500 fell by 60 points, or 1.4% while the Dow Jones Industrial Average fell by 408 points, or 1.2% as of 10:50  a.m. EST.  

Yields on Treasury notes moved higher with the yield on the 10-year hovering at 3.046% and the one-year at 3.361%. 

– Elisabeth Buchwald

When is the next Federal Reserve meeting? 

The Fed’s policy-making arm meets again on Sept. 20 and 21, and announces its interest rate decision at the end of the two-day meeting.

– Elisabeth Buchwald

What could make Powell lean toward slowing rate hikes?

Consumer inflation slowed to an 8.5% annual rate in July from June’s blistering 9.1% pace. But since one month doesn’t make a trend, Powell may leave himself some wiggle room to see what another month of data show before the Fed’s policy arm meets again.

August’s consumer price report is due Sept. 13 and the monthly jobs report on Sept. 2.

– Medora Lee

What could make Powell lean toward staying the aggressive course?

Consumer inflation may have slowed in July from June, but inflation is more widespread. Prices aren’t just rising in select parts of the economy anymore. They’re happening in almost every sector, including rent, food, energy and medical services.

Also, the labor market remains extremely strong, with employers adding a robust 528,000 jobs last month. Along with that, wage growth surged, meaning wages will likely keep inflation elevated. Average hourly earnings jumped 0.5% for the month and 5.2% from a year ago.

– Medora Lee

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.  

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