February 21, 2024

Fed's Powell talks rate hikes: strong labor market will bring more constraints

Federal Reserve Chairman Jerome Powell sounded hawkish on inflation at a forum on Wednesday, saying he expects to raise interest rates many times ahead, and possibly at an aggressive pace.

“We believe there will be more constraints,” Powell told a monetary policy meeting in Sintra, Portugal. “The real driver is a very strong labor market.”

The comments reiterated a position taken by fellow Powell policymakers at their June meeting, where they said an increase of another half percentage point was likely by the end of 2023.

Assuming a quarter-percentage-point increase per meeting, that would mean two more hikes. Powell’s previous comments pointed to the possibility of the Fed raising interest rates in its meeting rotation, though he said on Wednesday that might not be the case, depending on the source of the data.

The Fed has raised rates at every meeting since March 2022, including four hikes by three-quarters of a point before pausing in June.

“You know, I’m not going to take action in back-to-back meetings,” he said during an exchange hosted by CNBC’s Sarah Eisen. The question-and-answer session took place at a forum hosted by the ECB.

Markets took a small hit when Powell spoke, with the Dow Jones Industrial Average down more than 120 points.

Central to the Fed’s current thinking is the belief that ten rate hikes in a row have not had time to have an impact on the economy. As a result, officials were unable to determine whether policy was “sufficiently restrictive” to bring inflation down to the Fed’s 2 percent target.

Most economists believe that rate hikes will eventually push the U.S. into at least a shallow recession.

“A recession is very likely,” Powell said, adding that it wasn’t “the most likely scenario, but it’s certainly possible.”

Asked about pressure on the banking sector, Powell said the issues that led to the closure of Silicon Valley Bank and two other institutions in March did consider the idea at the last meeting.

While Powell has repeatedly stressed that he sees overall health in the U.S. banking sector, he said the Fed needs to be mindful of possible problems with credit supply. Recent surveys point to a general tightening of standards and a drop in demand for loans.

“Bank credit availability and credit will probably come down a bit, but with a little bit of a lag. So we’re watching carefully to see if that plays out,” he said.

Powell’s central bankers also spoke forcefully at the forum about the need to keep inflation in check.

ECB President Christine Lagarde said she thinks “we still have a basis” and thinks “we are likely to hike rates again in July”. Bank of Japan Governor Kazuo Ueda said the BOJ may tighten its ultra-loose policy if inflation does not ease, while BoE Governor Andrew Bailey stressed the importance of lower prices and said he would not consider raising inflation to 2% Target.

“It’s going to take some time. It turns out that inflation is more persistent than we expected, not less,” Powell said. “Of course, it would be great if that day did come. But we’re not counting on that.”