Fed Chair Suggests Higher Interest Rates May Be Warranted Due to Positive Economic Data

Jerome H. Powell, the chair of the Federal Reserve, addressed the Economic Club of New York and discussed the central bank’s approach to interest rates. While emphasizing the need for caution, Powell suggested that if economic data continues to indicate strong growth, the Fed may need to raise interest rates further. The central bank is facing the challenge of balancing inflation control with avoiding unnecessary harm to the economy.

In recent months, the Fed has already raised interest rates to a range of 5.25 to 5.5 percent. However, the economy has shown unexpected resilience, with consumers spending, companies hiring, and overall growth remaining robust. This has led some economists to question if the current interest rates are sufficient to achieve the Fed’s 2 percent inflation goal.

Powell acknowledged the strong growth and labor market demand but highlighted the risk it poses to inflation if it continues. He mentioned that it is possible that interest rates haven’t been high enough for long enough to counter inflation effectively. While it is unlikely that interest rates will be raised at the upcoming meeting in November, Powell kept the possibility open for a rate increase in December.

Economists interpreted Powell’s remarks as a balanced approach, considering the uncertainty surrounding the economy’s future performance. The Fed is cautious about the potential impact of already raised rates and the recent increase in long-term interest rates. Higher long-term rates could tighten financial conditions and potentially affect growth, which the Fed will closely monitor.

Powell also acknowledged the geopolitical tensions, particularly the ongoing conflict between Israel and Gaza, and its potential impact on global economic activity. However, it remains too early to determine the exact consequences.

The stock market reaction to Powell’s speech was mixed, reflecting the uncertainty among investors regarding the immediate outlook for interest rates. Higher rates generally have a negative effect on stock values. The S&P 500 ended the day nearly 1 percent lower, accompanied by a rise in the 10-year Treasury yield, nearing the 5 percent threshold for the first time since 2007.

Despite the complexity of the current situation, Powell reiterated the Fed’s commitment to controlling inflation. Consumer price increases have decreased since their peak in 2022, but they remain at 3.7 percent, above the pre-pandemic level of around 2 percent. Powell acknowledged the range of uncertainties and risks and emphasized the committee’s cautious approach in light of the progress made so far.

Joe Rennison contributed reporting.