Fed lifts rates, Powell leaves door open to another hike in September
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[July 27, 2023] By
Howard Schneider and Michael S. Derby
WASHINGTON (Reuters) -The Federal Reserve raised interest rates by a
quarter of a percentage point on Wednesday and Fed Chair Jerome Powell
said the economy still needed to slow and the labor market to weaken for
inflation to "credibly" return to the U.S. central bank's 2% target.
The hike, the Fed's 11th in its last 12 meetings, set the benchmark
overnight interest rate in the 5.25%-5.50% range, a level last seen just
prior to the 2007 housing market crash and which has not been
consistently exceeded for about 22 years.
"The (Federal Open Market) Committee will continue to assess additional
information and its implications for monetary policy," the Fed said in
language that was little changed from its June 14 statement and which
left the central bank's policy options open as it searches for a
stopping point to the current tightening cycle.
Powell made no promises either way, with a September meeting eight weeks
from now considered "live" for another rate increase, though a continued
slowing of inflation and weaker economic data may also prompt
policymakers to pause.
In a press conference following the Fed's latest policy move, the Fed
chief said the central bank was very much looking at "the totality" of
incoming data, and particularly studying it for signs that the economy
is heading for a period of "below-trend" growth that Powell thinks is
necessary for inflation to fall.
Key price measures are still increasing at more than double the Fed's
target. While inflation has been easing, that has so far happened with
little apparent cost to the labor market, where the unemployment rate
remains at a low 3.6%. Economic growth has remained above the Fed's
estimated 1.8% trend rate; economists polled by Reuters expect data on
Thursday will show second-quarter gross domestic product expanded at
just that level.
Powell acknowledged as a positive development that inflation has fallen
from the highs of last year without serious damage to the economy.
But as the Fed enters a tricky period in its inflation fight, balancing
the need for further rate increases against the risks of going too far,
he said finishing the task on inflation will likely require some
economic losses.
"My base case is that we will be able to achieve inflation moving back
down to our target without a really significant downturn that results in
high levels of job losses," Powell said. "But it's a long way to be sure
and we have a lot left ... Reducing inflation is likely to require a
period of below-trend growth and some softening of labor market
conditions."
As stated after its meeting last month, the Fed said it would watch
incoming data and study the impact of its rate hikes on the economy "in
determining the extent of additional policy firming that may be
appropriate" to reach its inflation target.
Though inflation data since the Fed's June 13-14 meeting has been weaker
than expected, policymakers have been reluctant to alter their hawkish
approach until there is more progress in reducing price pressures. In
their most recent projections, issued at the end of the June meeting, 12
of 18 policymakers said they anticipated at least one more rate increase
would be needed by the end of this year for financial conditions to be
restrictive enough to ensure inflation continued to decline.
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U.S. Federal Reserve Board Chairman
Jerome Powell arrives to a news conference following a closed
two-day meeting of the Federal Open Market Committee on interest
rate policy in Washington, U.S., July 26, 2023. REUTERS/Elizabeth
Frantz
Powell said decisions would continue to be made on a
meeting-by-meeting basis and that officials can only provide limited
guidance about what's next for monetary policy in the current
environment.
"It is certainly possible that we would raise the (federal) funds
rate again at the September meeting if the data warranted, and I
would also say it's possible that we would choose to hold steady at
that meeting" if that was the right policy call, Powell said.
He cautioned, however, against expecting any near-term easing in
rates. "We'll be comfortable cutting rates when we're comfortable
cutting rates, and that won't be this year," Powell said.
'MODERATE' GROWTH
U.S. Treasury yields slid in choppy trading after the release of the
Fed policy statement, while U.S. stocks ended largely unchanged.
Futures markets showed little change in bets on the path of Fed rate
increases over the remainder of the year, with small odds given to a
rise in September.
"The forward guidance remains unchanged as the committee leaves the
door open to further rate hikes if inflation does not continue to
trend lower," said Kathy Bostjancic, chief economist at Nationwide.
"Our view is the Fed is likely done with rate hikes for this cycle
since continued easing of inflation will passively lead to tighter
policy as the Fed holds the nominal fed funds rate steady into
2024."
The Fed statement nodded to the economy's continued outperformance.
That has been captured in data as varied as continued job growth,
strong vehicle sales, and the gargantuan attendance numbers from the
new "Barbie" movie to the Taylor Swift concerts that earned a
mention in the central bank's most recent "Beige Book" report on
economic activity.
Job gains remain "robust," the Fed said, while it described the
economy as growing at a "moderate" pace, a slight upgrade from the
"modest" pace seen as of the June meeting.
Powell said he's still holding out hope the economy can achieve a
"soft landing," a scenario in which inflation falls, unemployment
remains relatively low and a recession is avoided.
But his comments about the need for slower growth suggest a possible
bias towards higher rates to put more pressure on demand. Though
Powell said Fed staff had relaxed a prediction of a recession in
coming months, outside analysts still think that's what it may take
to finish the inflation fight.
"We would still think that you need a recession or some deeper
slowing at some point in order to get inflation back to 2%," said
Veronica Clark, an economist at Citi. "So if we're not having a
recession in the next year, inflation is not back to 2% either ...
You are still dealing with high inflation and you do still need to
slow things more."
(Reporting by Howard Schneider and Michael S. Derby; Additional
reporting by Safiyah Riddle; Editing by Paul Simao)
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