It remains elevated: Inflation according to the Fed’s preferred measure rose 6.3% for the 12-month period ending July, according to a government report released earlier on Friday , while the core measure minus food and energy rose 4.6%. Yields on the U.S. government 2-year note dropped to the lows of the day following the report.
“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the committee will need to see before we are confident that inflation is moving down,” the Fed chief told the audience, gathered in person after two years of holding the conference virtually because of the pandemic.
“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%.”
Fed officials in June projected rates rising to 3.4% by the end of this year, according to their median estimate, and 3.8% by end 2023. They will update those forecasts in September. Investors were pricing in the probability of cuts in the back half of 2023, though Fed officials are starting to push back against that view.
Looking beyond the current rate-hike cycle, policy makers are trying to assess whether longer-run inflation pressures will remain persistent. Supply chain costs may be shifting higher, and the supply of U.S. labor could remain tight for years to come due to an aging population and limited immigration.
Powell said the labor market is “clearly out of balance” with demand for workers “substantially” exceeding supply.
US unemployment rate matched a five-decade low of 3.5% in July with payrolls fully recovering to pre-pandemic levels.
Ahead of Powell’s speech, several Fed officials emphasized the central bank is in no way done, with Kansas City Fed Chief Esther George noting that the destination of the federal funds rate may be higher than markets are currently priced for.
“We have to get interest rates higher to slow down demand and bring inflation back to our target,” said George, who votes on monetary policy this year.
Financial markets have the benchmark lending rate peaking under 4% early next year.
Asked how high the Fed should push borrowing costs, George said there was “more room to go” and pushed back against bets in financial markets the central bank would begin cutting rates next year.
“I think we will have to hold -- it could be over 4%. I don’t think that’s out of the question,” she said in a Bloomberg Television interview. “You won’t know that, I think, until you begin to watch the data signs.”
This article was provided by Bloomberg News.