Federal Reserve chair Jay Powell made no promise to pause a forceful campaign to rein in inflation after the US central bank lifted its benchmark interest rate above 5 per cent for the first time since 2007.
But for anyone listening to his nearly hour-long press conference on Wednesday, it was abundantly clear which way he was leaning.
“He couldn’t commit to a pause, but he all but did,” said Mark Zandi, chief economist of Moody’s Analytics.
The trajectory of US monetary policy has entered a new phase after 10 successive interest rate rises since March 2022. Raging inflation has begun to subside and economic growth is slowing. Turmoil in the financial sector, with failures of regional banks such as First Republic this week, have emboldened arguments for a pause in rate increases.
The Federal Open Market Committee nodded to the new landscape in a statement following its decision to raise the federal funds rate by a quarter-point to a new target range of 5 per cent to 5.25 per cent.
The committee ditched guidance it provided after its last meeting in March, when it said it “anticipates that some additional policy firming may be appropriate” to bring inflation under control. Rather, on Wednesday it said that “in determining the extent to which additional policy firming may be appropriate”, officials would take into account factors including incoming data and the cumulative impact of its recent string of rate increases.
The change, which Powell later described as “meaningful”, implied that while the Fed was soon likely to call time on further rate rises, it was not ruling them out.
Powell stuck to that message at the start of his press conference, saying in his opening remarks that the central bank is “prepared to do more if greater monetary policy restraint is warranted”.
But as the question-and-answer session progressed, Powell’s comments more directly hinted that with interest rates now above 5 per cent and a credit crunch among stressed regional banks likely to further cool the economy, the Fed may have finally reached a point where it has done enough to bend inflation down towards its longstanding 2 per cent target.
“There is a sense that we’re much closer to the end of this than to the beginning,” he told reporters. “If you add up all the tightening that’s going on through various channels, we feel like we’re getting close or maybe even there.”
Tiffany Wilding, chief US economist at Pimco, said pausing rate rises at the Fed’s next meeting in June would be the right call, given her concern that a pullback in bank credit could act as a “major drag” on the economy.
According to Powell, the Fed’s latest report tracking banks’ lending practices — the Senior Loan Officer Opinion Survey, due to be publicly released Monday — will show midsized banks further tightening lending standards.
“Powell and others have always said that monetary policy is an exercise in risk management, and I think what has become clear is that the downside risks to the outlook have grown, potentially substantially, and given that shifting balance of risk, it’s appropriate to pause,” Wilding said.
Powell acknowledged that in light of bank stress, the Fed need not raise interest rates “quite as high” as they would have in a more stable situation. But he made clear that the magnitude of the impact was uncertain and complicated the central bank’s assessment of when the policy rate has reached a so-called “sufficiently restrictive stance” — meaning one in which demand is damped enough to push inflation down to target.
Zandi at Moody’s Analytics went so far as to say it was a “mistake” for the Fed to have raised rates on Wednesday, citing not only the fact that the labour market is showing clear signs of weakening and inflation is easing, but that the bank stress is “serious” and not yet resolved.
“The system is still very fragile and unsettled, and they need to pay attention to this,” he said.
For some economists, the bigger error from Powell was in hinting too strongly that a pause is forthcoming, leaving the Fed exposed to having to abruptly change course if economic data suggests the inflation problem persists.
Jonathan Pingle, the chief US economist at UBS who used to work at the Fed, has warned that the wage data in Friday’s monthly jobs report is likely to be strong, as is core inflation measured by the consumer price index to be released next week. These could create what he called a “tough communications challenge” as the Fed would need to explain why it was “looking through that”.
Powell “may have wanted to increase the optionality towards a pause, but in the way he answered questions he pushed too far,” said Peter Hooper, vice-chair of research at Deutsche Bank, who worked for the Fed for almost 30 years. “I think he may regret [that].”
Source: Economy - ft.com
