Fed ‘Jumbo’ rate hike hangs in the balance as Powell sticks to hawkish view | Thread

Federal Reserve Chairman Jerome Powell has said officials will not back down in the battle to rein in inflation, bolstering expectations that they will make a third consecutive interest rate hike later this month. .

“We need to act now, frankly, strongly like we did,” Powell said in a recent address at the Cato Institute’s monetary policy conference in Washington.

“My colleagues and I are strongly committed to this project and we will remain there.” He spoke with a moderator during a virtual Q&A session.

US central bankers are rapidly raising interest rates to curb the highest inflation in four decades. They will then meet on September 20 and 21 and Powell has kept the option open for another 75 basis point move – after increases of this size in June and July – or a half-point increase. He said the decision depends on the “totality” of incoming data.

Officials will receive an important update on Tuesday with the release of consumer prices for August. Economists polled by Bloomberg forecast an increase of 8.1% over 12 months against 8.5% in July.

“The Fed has and accepts responsibility for price stability,” Powell said, noting that history warns against premature policy easing. This reiterates a warning he issued Aug. 26 at the Fed’s annual retreat in Jackson Hole, Wyoming.

Investors hardened their bets that the Fed would go big again after hawkish comments from other Fed officials. That trend continued after the European Central Bank raised rates earlier Thursday by 75 basis points and futures markets showed a Fed hike of that magnitude almost fully priced in for the end of the month.

Nor were the Fed doves of yore repulsive. Chicago Fed President Charles Evans, speaking in Illinois later Thursday, said officials “could very well do 75 in September,” noting that even if his decision was not made, “I know we need to raise interest rates to a level significantly higher than where they are now.

Moreover, a growing number of economists see a 75 basis point hike as the likely outcome. Following Thursday’s remarks, analysts at Bank of America Corp., Barclays Plc and Jefferies LLC changed their forecasts from a 50 basis point increase to a giant move. Economists at Goldman Sachs Group Inc. did the same on Wednesday evening.

The US economy performed well on stable consumer spending, although higher rates weighed on housing and investment. The labor market remains strong with an unemployment rate of 3.7%.

“The demand is still very, very strong in the labor market. We are still printing new payroll job numbers at a high level, wages are running at high levels,” Powell said. “Through our policy interventions, what we hope to achieve is a period of below-trend growth, which will lead to a better balance in the labor market and bring wages back to levels more consistent with 2% inflation. ”

Fed officials are hoping to stage a rare soft landing where growth moderates and inflation falls with little cost to jobs. But they also worry that public expectations of future prices are starting to drift after staying above their 2% target for more than a year.

They have made it clear that the way they intend to fight this drift is to raise borrowing costs even more and keep them there for a long time. If that is the strategy that rules the debate this month, it makes the case for another giant move.

“It’s very important that inflation expectations stay anchored,” Powell said, adding that “time is running out” to ensure they stay that way.

“The longer inflation remains well above target, the greater the fear that the public will begin to naturally factor higher inflation into their economic decision-making,” he said. “Our job is to make sure that doesn’t happen.”

(Updates with Evans’ comment in seventh paragraph.)

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