Fed Chair Powell’s Speech Could Indicate Extended Period of High Interest Rates

When Federal Reserve Chair Jerome Powell delivers a high-profile speech in Jackson Hole, Wyoming, analysts anticipate that he will make it clear that the Fed plans to maintain its benchmark interest rate at a peak level for a longer duration than previously expected. While Powell is unlikely to confirm whether the Fed will continue raising rates, he may indicate that rate cuts are unlikely until well into the following year. The central bank aims to keep rates high to slow borrowing and spending, as well as reduce inflation to their 2% target.

Powell’s speech comes at a time of uncertainty surrounding the economy and interest-rate policies. Despite inflation easing from its peak of 9.1% in June 2022 to 3.2%, businesses are hiring, and consumer spending remains resilient. However, “core” inflation, which excludes food and energy prices, remains elevated at 4.7% despite the 11 rate hikes initiated by the Fed since March 2022. The Fed’s decision to raise its key rate to 5.4% has resulted in increased borrowing costs, impacting consumers and businesses. As a result, home sales have dropped by 22% in the first seven months of 2023 compared to the previous year.

Compared to the previous year, the mixed economic picture poses a more challenging situation for Powell. He must navigate a narrow path of slowing growth and cooling inflation without causing a recession, which is known as achieving a “soft landing.” Analysts believe that Powell will signal his intention to keep rates at high levels for as long as necessary. Even if the Fed does not increase borrowing costs any further, they are unlikely to reduce them in the near future.

In last year’s Jackson Hole speech, Powell warned that the Fed’s rate hikes would bring pain to households and businesses. This year, economists caution Powell against predicting a “painless disinflation” as it would undermine the Fed’s determination to address inflation effectively. Despite the Fed’s rate hikes, the US unemployment rate remains at 3.5%, indicating that achieving the Fed’s 2% inflation goal may require some increase in unemployment. Higher jobless rates typically result in slower wage growth and easing of inflation pressures.

Raphael Bostic, president of the Federal Reserve’s Atlanta branch, stated that he supports keeping the Fed’s key rate at its current level until at least next year. The Fed’s projections from June, which predicted one more rate increase this year, may have changed due to recent milder inflation readings. The Fed’s rate-setting committee will update their interest rate projections when they meet on September 19-20.

Bostic emphasized the need to remain restrictive for an extended period until they are confident that inflation will not deviate significantly from the target. While Bostic believes the Fed’s benchmark rate is currently sufficient to restrain the economy and cool inflation over time, he does not foresee any rate cuts until the latter part of 2024.

Overall, Powell’s upcoming speech is expected to provide insights into the Fed’s stance on interest rates, indicating a potential continuation of high rates for an extended period to manage inflation and economic growth.

Focus keyword: Fed Chair Powell’s Speech, Interest Rates, Inflation