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Federal Reserve chair Jay Powell has warned against being “misled” by good data on prices, saying the mission to return inflation to the US central bank’s 2 per cent target had a “long way to go”.
Speaking at an IMF event on Tuesday, the Fed chair said officials were “gratified” by the retreat in price pressures but stopped short of sounding the all-clear on an inflation problem that has proven more persistent than policymakers expected.
“We know that ongoing progress toward our 2 per cent goal is not assured: inflation has given us a few head fakes,” he said in prepared remarks. “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”
In a sign that there is little urgency in the bank to immediately raise rates again, Powell emphasised the Fed would continue to “move carefully”, in order to “address both the risk of being misled by a few good months of data, and the risk of overtightening”.
Powell’s comments come on the heels of the central bank’s latest policy meeting, at which officials extended a pause in their historic monetary tightening campaign.
The decision to keep the benchmark interest rate steady at a 22-year high of between 5.25-5.5 per cent for a second-straight gathering reflected greater caution among officials amid a multitude of headwinds that are widely expected to slow growth from the breakneck 4.9 per cent annualised pace registered in the third quarter.
Despite further signs that the labour market is losing momentum, officials have been wary to declare that interest rates are now “sufficiently restrictive”. Powell on Thursday reiterated that the Fed was “not confident” it had yet reached that point.
Whipsawing global borrowing costs have complicated that assessment further. A recent run-up in long-term interest rates, which gained steam ahead of the Fed’s latest meeting, has mostly been unwound. The benchmark 10-year Treasury note trades at about 4.5 per cent, roughly half a percentage point lower than its October peak.
Powell suggested last week that tighter financial conditions could help prevent the need for further rate rises given the expected drag on spending and hiring. But he also made clear that the impact of the increase in borrowing costs would largely depend on how long the market move lasted.
“We are attentive to the risk that stronger growth could undermine further progress in restoring balance to the labour market and in bringing inflation down, which could warrant a response from monetary policy,” Powell added on Thursday.
Still, traders in federal funds futures markets broadly expect that the policy rate has peaked, with the debate now shifting to when the central bank will begin to cut.
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