Fed Chair Powell Hints at Back-to-Back Rate Hikes Amid Lingering Inflation Concerns

Federal Reserve Chair Jerome Powell, speaking at a central banker conference in Sintra, Portugal, emphasized that the central bank remains committed to curbing inflation and indicated the possibility of consecutive rate hikes in the upcoming monetary policy meetings.

Powell cited stronger-than-expected economic growth, a tight labor market, and persistently high inflation as factors necessitating further tightening. With concerns about core inflation and the need for better labor market conditions, the Fed aims to strike a delicate balance between economic growth and price stability.

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During recent congressional hearings, Powell acknowledged the need to address inflation, which has consistently exceeded the Fed's 2% target. Despite the temporary pause in the Fed's aggressive rate-hiking campaign, the latest Summary of Economic Projections suggests the likelihood of two more quarter-point rate hikes this year. The timing and frequency of these hikes are yet to be determined, as policymakers await further economic data before making any decisions.

Fed officials have expressed concerns about core inflation, which includes volatile food and gas prices, decelerating at a slower pace than overall inflation. Powell reiterated that services inflation, particularly in labor-intensive sectors such as restaurants and healthcare, is expected to remain elevated. The dominant influence of labor expenses in these sectors necessitates a better alignment of labor supply and demand to alleviate inflationary pressures.

Citing a study by former Fed Chair Ben Bernanke, Powell noted that the labor market has had a slight but persistent impact on inflation, requiring measures to slow down the economy. However, recent labor market performance has consistently outperformed expectations, with significant job additions and a declining unemployment rate in May. These positive indicators underscore the challenge faced by the Fed in balancing economic growth and inflation control.

Powell acknowledged that the decision to pause the rate hike campaign was partially influenced by spring bank strains. Research suggests that such bank stress can lead to reduced credit availability with a lag effect, impacting financial conditions comparable to a rate hike. The Fed closely monitors credit conditions and will be observing whether bank-credit availability continues to be affected following the previous period of instability.

While Powell refrained from commenting on specific fiscal policies or government spending, he clarified that government expenditure is not considered a significant driver of inflation. He noted that spending during the pandemic had been high but has since stabilized or possibly contracted slightly. Powell emphasized that fiscal impulses are not a primary consideration when formulating monetary policy.

With its cautious approach to balancing economic growth and price stability, the central bank will continue to monitor credit conditions and remain vigilant in its efforts to maintain stability in the economy.