June 22, 2023 (MLN): Federal Reserve chair Jerome Powell said that policymakers expect interest rates to move higher, but at a more moderate pace to reduce the hardship that high inflation is causing, said a press issued yesterday.

“Earlier in the process, speed was very important,” Powell said Wednesday in testimony before the House Financial Services Committee, referring to the pace at which officials lifted rates over the past year. “It is not very important now.”

The Federal Open Market Committee paused its series of interest-rate hikes last week for the first time in 15 months, leaving rates in a range of 5% to 5.25%.

But Fed officials estimated rates would rise to 5.6% by the end of the year, according to their median projection, implying two additional quarter-point hikes following surprisingly persistent inflation and labor-market strength.

Since early last year, the FOMC has significantly tightened the stance of monetary policy, and has raised policy interest rate by 5%age points while also reducing securities holdings at a brisk pace.

“We have covered a lot of ground, and the full effects of our tightening have yet to be felt,” Powell added.

The U.S. economy slowed significantly last year, and recent indicators suggest that economic activity has continued to expand at a modest pace. Although growth in consumer spending has picked up this year, activity in the housing sector remains weak, largely reflecting higher mortgage rates.

Higher interest rates and slower output growth also appear to be weighing on business fixed investment.

Committee participants generally expect subdued growth to continue. In our Summary of Economic Projections, the median projection has real GDP growth at 1.0% this year and 1.1% next year, well below the median estimate of the longer-run normal growth rate.

The labor market remains very tight. Over the past three months, payroll job gains averaged a robust 283 thousand jobs per month.

The unemployment rate moved up but remained low in May, at 3.7%. There are some signs that supply and demand in the labor market are coming into better balance.

The labor force participation rate has moved up in recent months, particularly for individuals aged 25 to 54 years.

Nominal wage growth has shown signs of easing, and job vacancies have declined so far this year. While the jobs-to-workers gap has declined, labor demand still substantially exceeds the supply of available workers.

FOMC participants expect supply and demand conditions in the labor market to come into better balance over time, easing upward pressures on inflation.

The median unemployment rate projection in the SEP rises to 4.1% at the end of this year and 4.5% at the end of next year.

Inflation remains well above the longer-run 2% goal. Over the 12 months ending in April, total PCE prices rose 4.4%; excluding the volatile food and energy categories, core PCE prices rose 4.7%.

In May, the 12-month change in the Consumer Price Index came in at 4.0%, and the change in the core CPI was 5.3%.

Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go.

The median projection in the SEP for total PCE inflation is 3.2% this year, 2.5% next year, and 2.1% in 2025.

Core PCE inflation, which excludes volatile food and energy prices, is projected to run higher than total inflation, and the median projection has been revised up to 3.9% this year.

Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

How Safe Are US Banks?

Lawmakers also pressed Powell on the Fed’s plans to strengthen supervision and regulation for regional and big banks in the wake of several bank failures earlier this year.

Powell said that the Fed board had not yet voted on changes to bank rules, but staff had been briefed on some tweaks that are under consideration. He added that the biggest US lenders were “very well capitalized” and that the central bank must be careful not to harm the business model of smaller lenders.

Copyright Mettis Link News

Posted on: 2023-06-22T10:38:27+05:00