“Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, higher food and energy prices, and broader price pressures,” the Federal Open Market Committee said as it raised the policy rate to a range between 2 .25% and 2.50%. The FOMC added that it remains “very cautious” on inflation risks. Powell made that point at a news conference after the unanimous policy decision was released, saying it was “essential” to bring down inflation. Sign up now for FREE unlimited access to Reuters.com Register Fed officials are “fully aware” of the hardships inflation is putting on American households, particularly those with limited means, Powell said, and they will not relent until there is “substantial evidence” that inflation is easing. Inflation has soared to four-decade highs this year and, when measured by the Fed’s preferred gauge, is running at more than three times the central bank’s 2 percent target. Reuters Graphics Reuters Graphics “Restoring price stability is just something we have to do,” Powell said. “There is no option to fail in doing this.” While job gains remained “strong,” officials noted in the new policy statement that “recent indicators of spending and output have softened,” a nod to the fact that the aggressive rate hikes they’ve put in place since March are beginning to bite . However, Powell insisted that the economy is enjoying underlying strength. “I don’t think the U.S. is currently in a recession,” he said, citing an unemployment rate that remains close to a half-century’s low and steady rate of wage growth and job creation. “It doesn’t make sense that the US is in a recession.” Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, U.S., July 27, 2022. REUTERS/Elizabeth Frantz read more However, reducing inflation to the Fed’s target “is likely to involve a period of below-trend economic growth and some easing in labor market conditions, but such outcomes are likely necessary to restore price stability and set the stage for the achievement of maximum employment and stable prices in the long run’.
DATA DEPENDENT
In addition to a 75-basis-point hike last month and smaller moves in May and March, the Fed has raised its policy rate by a total of 225 basis points this year as it battles a burst of inflation to 1980s levels with the 1980-style monetary policy. The policy rate is now at a level that most Fed officials believe has a neutral economic impact, effectively marking the end of pandemic-era efforts to encourage spending by households and businesses with cheap money. The rate also matches the high point of the central bank’s previous tightening cycle from late 2015 to late 2018, a level reached this time in just four months. The latest policy statement gave little clear guidance on what steps the Fed might take next, a decision that will depend largely on whether upcoming data shows inflation is beginning to slow. With the latest data showing consumer prices rising at an annual rate of more than 9%, investors expect the US central bank to raise its policy rate by at least half a percentage point at its September 20-21 meeting. “While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we receive between now and then,” Powell said. “We will continue to make our decisions meeting by meeting and communicate our thinking as clearly as possible.” Futures markets tied to Fed policy expectations edged back somewhat toward a more modest rise for the next session as Powell spoke. In the US Treasury market, which plays a key role in transmitting the Fed’s policy decisions to the real economy, yields on the 2-year note, which is more sensitive to policy expectations, moved lower. The yield on the 10-year bond was little changed. Wall Street stocks added to big gains in the session, with the S&P 500 (.SPX) closing 2.6% higher, while the dollar (.DXY) fell against a basket of major trading partners. “From here, the Fed is likely to slow its pace of tightening, reassured by the potential peaking of inflation and easing inflation expectations as oil prices have fallen,” Seema Shah, chief global strategist, said in a note of Principal Global Investors. “However, with the labor market still a picture of strength, wage growth still uncomfortably high and core inflation receding at a glacially slow pace, the Fed certainly cannot stop tightening, nor can it cut too much the speeds”. Sign up now for FREE unlimited access to Reuters.com Register Report by Howard Schneider and Ann Saphir. Editing by Dan Burns and Paul Simao Our Standards: The Thomson Reuters Trust Principles.
