Federal Reserve chair Jay Powell has warned the US central bank against the risk of being “misled” by good data on prices, saying the mission to return inflation to its 2 per cent target had a “long way to go”.
Speaking at an IMF event on Thursday, the Fed chair said officials were “gratified” by the retreat in price pressures but stopped short of sounding the all-clear on an inflation problem that has proven more persistent than policymakers expected.
“We know that ongoing progress toward our 2 per cent goal is not assured: inflation has given us a few head fakes,” he said in prepared remarks. “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”
In a sign that there is little urgency in the bank to immediately raise rates again, Powell emphasised the Fed would continue to “move carefully”, in order to “address both the risk of being misled by a few good months of data, and the risk of overtightening”.
Powell’s comments, which were briefly interrupted by climate protesters, come on the heels of the central bank’s latest policy meeting, at which officials extended a pause in their historic monetary tightening campaign.
The decision to keep the benchmark interest rate steady at a 22-year high of between 5.25-5.5 per cent for a second-straight gathering reflected greater caution among officials amid a multitude of headwinds that are widely expected to slow growth from the breakneck 4.9 per cent annualised pace registered in the third quarter.
The US economy’s resilience this year had been “remarkable”, Powell said in the discussion after the event on Thursday, especially in the face of what he described as “significantly restrictive policy”.
US stocks and government bonds extended their losses on Thursday after Powell’s comments, with the benchmark S&P 500 down 0.6 per cent in mid-afternoon trading.
Treasuries remained under pressure, with the 30-year yield up 0.13 percentage points on the day at 4.8 per cent, and the benchmark 10-year yield rising 0.11 percentage points to 4.62 per cent. Bond yields move inversely to prices.
Those moves followed a 30-year Treasury auction earlier in the day. Market participants also said that a ransomware attack on the Industrial and Commercial Bank of China had disrupted the settlement of Treasury trades on Thursday.
Despite further signs that the labour market is losing momentum, officials have been wary to declare that interest rates are now “sufficiently restrictive”. Powell reiterated that the Fed was “not confident” it had yet reached that point.
Whipsawing global borrowing costs have complicated that assessment further. A recent run-up in long-term interest rates, which gained steam ahead of the Fed’s latest meeting, has mostly been unwound. The benchmark 10-year Treasury note trades at roughly half a percentage point lower than its October peak.
Answering an audience question, Powell said the Fed would not “ignore a significant tightening of financial conditions” that had come through higher government bond yields. But he reiterated that the impact on policy would largely depend on how long the market move lasted.
“We are attentive to the risk that stronger growth could undermine further progress in restoring balance to the labour market and in bringing inflation down, which could warrant a response from monetary policy,” Powell added on Thursday.
Still, traders in federal funds futures markets broadly expect that the policy rate has peaked, with the debate shifting to when the central bank will begin to cut.
Speaking on the same panel, Gita Gopinath, the first deputy managing director at the IMF, warned central bankers against a “premature” easing of monetary policy, while emphasising that the communications challenges will be particularly tricky.
“On the one hand, you see inflation headed in the right direction, but on the other hand, you realise that this mile will likely be the toughest,” she said.
Additional reporting by Harriet Clarfelt
