Powell says Fed could raise rates further if inflation doesn't continue to ease

With its aggressive interest rate hikes, the Federal Reserve has made significant progress toward bringing down inflation to its 2% goal but is prepared to raise rates further if appropriate, Fed Chair Jerome Powell said Friday.

He also did not say when the Fed might start cutting rates, though he could provide more details in a conversation that is expected to follow his speech.

“Having come so far so quickly, the (Fed’s policymaking committee) is moving forward carefully, as the risks of under- and over-tightening are becoming more balanced,” Powell said in a speech at Spelman College in Atlanta.

"We don't need to be in a rush now," Powell added in a chat with Spelman College President Helene Gayle.

But, he added, “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.”

Powell’s remarks underscore that the Fed chief isn’t inclined to shift the central bank’s vigilant stance on inflation and interest rates despite the widespread assumption by economists and investors that it’s almost certainly done raising rates and could start cutting as early as spring.

On Thursday, Fed board member Christopher Waller stoked such speculation by saying the Fed could start lowering rates within several months if inflation continued to come down even if the nation didn’t slip into a recession.

His remarks were noteworthy because Waller is considered “hawkish,” or more inclined to lift rates to fight inflation than cut them to stimulate the economy.

Since early last year, the Fed has hoisted its key short-term interest rates from near zero to a range of 5.25% to 5.5%, its most aggressive such campaign in four decades, to wrestle down annual inflation that hit 7% in the summer of 2022, according to the Fed’s preferred measure. The jump in prices has been traced to COVID-related supply chain bottlenecks and a post-pandemic surge in consumer demand.

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The Fed’s sharp rate increases have pushed mortgage rates above 7%, damping the housing market, and driven up rates for auto loans, credit cards, corporate bonds and other types of borrowing. That has crimped consumer spending and business investment and economic growth broadly, though the economy has remained surprisingly resilient. Meanwhile, job growth has slowed but has stayed sturdy.

Powell noted in his speech Friday that inflation declined to 3% in October, though a core reading that excludes volatile food and energy items is higher at 3.5%. Yet over the past six months, core inflation has been running at an annual rate of 2.5%, he said. Powell traced the pullback to a better balance between supply and demand, as well as the Fed’s rate increases.

Markets that predict where Fed rates are headed reckon the Fed won’t hike rates further and will likely start cutting by May.

But economists have said the Fed likely won’t solidify such expectations because that would further goose the stock market and lower interest rates on consumer and business loans – a scenario that could reignite inflation.

"We are making decisions meeting by meeting, based on the totality of theincoming data and their implications for the outlook for economic activity and inflation,as well as the balance of risks," Powell said.