Federal Reserve Chair Jerome Powell emphasized that the fight against inflation still has a "long way to go" during his testimony before the House Financial Services Committee. Powell acknowledged that inflation has moderated somewhat since last year, with the Fed's preferred measure falling to 4.4% as of April from a peak of 7% in 2022. However, he highlighted that recent progress has been slow, and inflation pressures continue to remain high. Despite the decision to hold off raising interest rates at the recent Federal Open Market Committee meeting, Powell stated that most participants anticipate further rate increases by the end of the year.
While investors generally expect rate increases to resume at the Fed's July meeting, doubts about additional hikes are reflected in financial market indicators. Powell expressed understanding for the hardship caused by high inflation and reiterated the Fed's commitment to bringing it back to the 2% target. The testimony before the House committee, where Republicans hold the majority, is part of Powell's twice-yearly reports to federal lawmakers. Powell is also scheduled to appear before the Senate Banking Committee on Thursday.
Powell presented a nuanced discussion on the ongoing debate among policymakers, weighing the strength of the U.S. labor market and the "modest" economic growth against the potential impact of previous rate increases. The full effects of monetary restraint on inflation and the economy have yet to be realized, making it challenging for officials to determine if interest rates are sufficiently high or if further restraint is necessary. Additionally, stress in the banking sector is creating uncertainties for households and businesses.
The decision not to raise rates at the recent meeting was seen as a prudent step to gather additional information and assess its implications for monetary policy, given the current circumstances. Powell affirmed that more interest rate increases are likely ahead until there is more progress in reducing inflation. The FOMC participants expect that it will be appropriate to raise rates somewhat further by the end of the year, signaling the possibility of two additional hikes in 2023. Inflation, although it has cooled, remains above the Fed's 2% target, with core inflation running at a rate of 4.7% and the core consumer price index for May at 5.3%.
The lagging effect of monetary policy moves, such as rate hikes, and the need to observe the impact on the economy were factors in the decision to hold off on raising rates this month. Powell acknowledged that the labor market is still tight, but conditions are showing signs of loosening, such as an increase in labor force participation and moderate wage growth. However, there is still a significant disparity between the number of job openings and the available labor pool. Powell noted that inflation expectations are well-anchored and that getting inflation lower will require slowing down the economy to below-trend growth. He emphasized that rate decisions will be data-dependent and made on a meeting-by-meeting basis, rather than following a predetermined course.
The testimony briefly touched on the banking turmoil experienced earlier this year. Powell recognized that the episode served as a reminder for the Fed to ensure appropriate supervisory and regulatory practices.
