Fed chair strikes a wary tone as biden prepares to tout economy

WASHINGTON – Federal Reserve Chair Jerome Powell underscored that the central bank has more work to do when it comes to slowing the economy, and that officials remain determined to wrestle rapid inflation under control, even if that means pushing rates higher than expected.

Powell, speaking in a Q&A session at the Economic Club of Washington, D.C., on Tuesday, called a recent slowdown in price increases “the very early stages of disinflation.” He added that the process of getting inflation back to normal will likely be bumpy.

“There has been an expectation that it will go away quickly and painlessly – and I don’t think that’s at all guaranteed; that’s not the base case,” Powell said. “The base case for me is that it will take some time, and we’ll have to do more rate increases, and then we’ll have to look around and see whether we’ve done enough.”

The Fed chair’s comments came hours before President Joe Biden is set to deliver the annual State of the Union speech and offered some contrast in tone.

Democrats are embracing a historically strong economy with super-low unemployment and rapid wage growth, cheering a report last week that showed employers added more than half a million jobs in January. But Fed officials have met the news with more caution. The central bank is supposed to foster both full employment and stable inflation, and policymakers have been concerned that the strength of today’s job market could make it harder for them to return wage and price increases to historically normal levels.

Powell said that the Fed did not expect the jobs report to be so strong, and that the ongoing robustness reinforced why the process of lowering inflation “takes a significant period of time.”

While he said that it is good that the disinflation so far has not come at the expense of the labor market, he also underscored that further interest rate moves will be appropriate and borrowing costs will need to remain high for some time. And he embraced how markets have adjusted in the wake of the strong hiring numbers: Investors had previously expected the Fed to stop adjusting policy very soon, but now see rate increases in both March and May.

“We anticipate that ongoing rate increases will be appropriate,” Powell said. He said that in the wake of the jobs report, financial conditions are “more well aligned” with that view than they had been previously.

To try to slow the economy and choke off inflation, policymakers raised interest rates from near-zero early last year to more than 4.5% at their last meeting, the quickest pace of adjustment in decades. Higher borrowing costs weigh on demand by making it more expensive to fund big purchases or business expansions. That in turn tempers hiring and wage growth, which further cools the economy.

Powell had hinted during a news conference last week that the Fed is discussing a couple more rate increases and could do more if needed. He also underlined that the central bank will leave interest rates high for some time. But those comments came before the release of a blockbuster January employment report.

Still, Powell seemed to reinforce that basic plan Tuesday, and said if inflation remains high or the job market stays strong, “it may well be the case” that the Fed will have to raise rates by more than markets currently expect. Stock indexes initially jumped as Powell spoke, then plummeted, and then jumped again as investors tried to parse his remarks.

“Powell leveraged the employment report to lend credibility to the hawkish elements of the February message,” Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, wrote in response to the speech. Hawkish means tilted toward higher interest rates.

But he “was far from max hawkish,” Guha continued, explaining why investors were relieved following the speech.

Powell called getting inflation back down “the biggest challenge” facing the Fed, and noted that in the services sector of the economy – which includes industries such as restaurants, travel and health care – “we’re not seeing disinflation yet.”

Fed officials aim for 2% inflation on average over time. Their preferred inflation measure remains much higher than that, at 5%, though that is down from a peak of about 7% last summer.

Central bankers are quick to acknowledge that the current bout of inflation has not been primarily the result of a strong labor market and climbing wages; it has stemmed from supply chain issues that caused shortages and collided with strong demand fueled partly by government stimulus.

But some worry that a booming economy could keep inflation unusually elevated.

Fed officials have at times said that pay gains – which have moderated somewhat but are still climbing around 5.1% on a yearly basis in one closely watched quarterly measure, and by 4.4% in monthly numbers – would probably need to slow to a range of 3% to 3.5% to line up with their inflation goal.

If companies are paying more, they are likely to charge more to try to cover their costs. And as consumers earn more, they may be able to keep spending despite climbing prices.

Some politicians and economists have embraced the recent slowdown in inflation and wage growth as a sign that the Fed might pull off a “soft landing”: cooling the economy enough to drive price increases lower without throwing people out of work.

But Fed officials have been more cautious about whether roaring labor conditions and moderating inflation can continue together indefinitely. Typical economic models suggest that it would be difficult for wages and prices to slow down fully in a labor market this tight.

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