By CHRISTOPHER RUGABER – AP Economics Writer
WASHINGTON (AP) — Jerome Powell delivered a stark message early in a press conference Wednesday: Inflation is far too high and the Federal Reserve is laser-focused on taming it with higher borrowing costs.
Yet despite his resolute words, the Fed chairman also said for the first time that the central bank’s actions are already having an effect on the economy in ways that could curb the country’s worst inflation since. four decades.
With the Fed’s benchmark interest rate now at a level that should neither boost nor dampen growth, Powell said the pace of rate hikes could slow in the coming months. And he pointed to signs that many companies are finding it easier to fill jobs, a trend that would limit wage increases and potentially slow inflation.
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“There were hints that we are closer to the end than the beginning” of the Fed’s efforts to tighten credit, said Michael Feroli, an economist at JPMorgan Chase and a former Fed staffer.
Powell’s suggestion that the Fed could moderate future rate hikes after announcing a three-quarter point hike on Wednesday – its second straight of this substantial size – helped spark a celebratory rally in the stock market, with the S&P 500 jumping 2.6% and the tech-heavy Nasdaq, which climbed 4.1%, its biggest gain in more than two years.
Some economists did not share the market’s optimism. They noted that Powell had left the door open for another big rate hike at the Fed’s next meeting in September. The Fed Chairman also indicated that even if the economy were to fall into recession, the central bank would continue to raise rates if it deemed it necessary to rein in still-high inflation.
When asked at his press conference if a recession would alter the course of Fed rate hikes, Powell simply replied, “We’re going to focus on bringing inflation down.”
Here are five takeaways from the Fed’s interest rate policy meeting and Powell press conference:
POWELL: THE UNITED STATES IS NOT IN RECESSION
A flurry of recent data has signaled that the economy is weakening. Economists are increasingly forecasting a recession later this year or in 2023. Powell, however, pointed to the robust job market on Wednesday as evidence that the economy is not in recession, at least not yet.
Employers, he noted, added 2.7 million jobs in the first half of the year, the US unemployment rate of 3.6% is near a 50-year low and growth wages is strong.
“It doesn’t make sense that the economy could be in a recession with this kind of thing going on,” the Fed chairman said.
On Thursday, the government will estimate second-quarter gross domestic product, the broadest measure of national production of goods and services. Some economists believe the GDP report will show the economy contracting for a second straight quarter, which would fit an informal definition of a recession.
But even if that’s the case, the most widely accepted definition of a recession is that determined by the National Bureau of Economic Research, a group of economists whose Business Cycle Dating Committee defines a recession as “a significant decline in the economic activity that spreads throughout the economy and lasts for more than a few months.
Powell also noted that the government’s quarterly GDP estimate is often revised significantly afterwards and that initial reports of economic growth should be taken with “a grain of salt”.
The Fed Chairman issued a cautionary note, noting that there are signs labor market momentum is easing. Job postings have fallen slightly, more people are applying for unemployment assistance and hiring is lower than it was at the start of the year.
SLOWER GROWTH, GOOD RECRUITMENT
But even these signs of a slightly weaker labor market are not all bad news, at least from the Fed’s perspective.
The Fed wants to cool the economy with its rate hikes, which make home loans, auto loans and corporate borrowings more expensive. As consumers and businesses spend less, the resulting decline in demand may bring inflation closer to the Fed’s 2% annual target.
“We think it’s necessary to slow growth, and growth will slow this year,” Powell said.
Since the start of this year, the Fed has steadily raised its forecast for how quickly and how much it would need to raise rates to beat inflation. On Wednesday, however, Powell said the estimates Fed policymakers made a month ago for where rates would go next were still the best guide.
In June, officials expected the Fed’s key rate to reach between 3.25% and 3.5% by the end of this year, which Powell said was a “moderately restrictive” level. And at least two more rate hikes were planned for next year.
For the Fed to meet this end-of-year target, it would take a half-point hike in September and two quarter-point hikes in November and December. Such increases would represent a much more modest pace than the 2.25 percentage point hikes the Fed has made in the past four meetings alone, the fastest pace since the early 1980s.
Other major central banks around the world have also imposed steep rate hikes to fight inflation, which has soared in almost all advanced economies.
The European Union raised its short-term rate by half a point last week. Canada’s central bank announced a full one percentage point hike earlier this month. Last month, the Swiss National Bank implemented a half-point hike, its first increase in 15 years.
While higher rates around the world can help curb inflation, they also carry the threat of causing a global economic slowdown.
This week, the International Monetary Fund lowered its outlook for global economic growth to 3.2% this year. That was down from an estimate of 3.6% in April and much slower than last year’s pace of 6.1%.
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