To maintain control over inflation, the Federal Reserve may need to raise interest rates even further. On Friday, during his speech at the Symposium in Jackson Hole, Federal Reserve Chairman Jerome Powell made this announcement.
Given both the progress made in lowering price pressures and the risks associated with the strength of the US economy, he promised measures in the next meetings that would be cautious and careful.
Powell's statement was somewhat calmer than his address at last year's annual economic policy symposium in Jackson Hole, but his statements nonetheless caused quite a stir. Many investors now anticipate additional rate hikes before the year is out.
"We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data," Powell said in a keynote address. "It is the Fed’s job to bring inflation down to our 2% goal, and we will do so."
Since March 2022, the Fed has already increased interest rates by 5.25 percentage points, and inflation has gone down from 7% during the summer of 2022 to 3.3% currently.
Powell did not offer a clear signal for future rate cuts, and he did not voice support for the idea of decreasing rates once inflation becomes more robust, as other policymakers have done.
Futures contracts tied to the Fed's discount rate showed a below 20% chance of a rate hike in September as of Friday's closing but over 50% chance of ending the year with a discount rate of 5.5%. This is an increase of 0.25 percent over the current rate. In addition, the Federal Open Market Committee (FOMC) will convene in November and December.
The yield on the two-year Treasury note reached 5.08%, marking the highest level seen since the market closed in June of 2007.
According to Powell, it is pretty difficult to pinpoint the exact gap between the current base rate and the "neutral" interest rate. Consequently, gauging the extent to which the Fed might be stifling economic growth and inflation remains a complex task.
Powell reaffirmed the Fed's standard assessment of inflation's trajectory, which includes the following trends: inflationary spike during the pandemic; decelerating inflation in commodity prices; decelerating inflation in housing; but caution regarding continued consumer spending on a wide range of services; and tight labor market restrictions that could make reaching the 2% target tricky.
Although the Fed chairman's tone was not as stern as it was last year when he plainly proclaimed the end of the Fed's rate hike cycle and plans for rate cuts this year, he did not rule out the possibility of further rate cuts.
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