Fed Chair to Slow Rate Hikes, but ‘Will Stay the Course’

WASHINGTON — Chairman of the Federal Reserve Jerome Powell gave America news that encouraged a stock market rally Wednesday when he admitted the Fed is willing to slow the rate of interest rate increases.

After he spoke at the Brookings Institution on Wednesday afternoon, the Dow Jones Industrial Average closed up 737 points, or 2.18%. Tech stocks on the Nasdaq Composite fared even better, up 4.41%.

Despite announcing a reduction in the size of rate hikes, he claimed the Fed would keep monetary policy restrictive. 

“History cautions strongly against prematurely loosening policy,” Powell explained as he was questioned by David Wessel, director of Brookings’ Hutchins Center on Fiscal and Monetary Policy. “We will stay the course until the job is done.”

Powell admitted that slowing the pace of rate hikes may be the best way for the Fed to hedge its bets. 

“One risk management technique is to go slower. Another is to hold on longer at a higher level and not loosen policy too early,” Powell said. “[We are in a] very difficult situation in which to forecast inflation. … My colleagues and I do not want to overtighten.” 

He also stressed that “without price stability, the economy does not work anymore.”

While private forecasts have predicted inflation declines over the next year, Powell admitted that the path ahead for inflation remains highly uncertain.

Inflation in early 2021 was related to tightness in the goods market. Now core goods inflation is easing, but inflation continues to rise in housing services and core services other than housing — like health care, education and hospitality. He said labor market dynamics are the key to understanding inflation in the latter category.

A labor supply shortfall opened up during the pandemic, with a current gap of roughly 3.5 people, that is unlikely to close anytime soon for a number of reasons, including slower growth in the working age population. One boon of the tight labor market has been an apparent boost in worker wages, yet for most, any increase in wages is actually being eaten up by inflation. 

“To be clear, strong wage growth is a good thing,” Powell said. “But for wage growth to be sustainable, it needs to be consistent with 2% inflation.

“We think there’s a job for … getting the labor force back in balance,” he said, while he also stressed, “policies to support labor supply are not in the domain of the Fed.”

“I continue to believe that there is a path to a soft or softish landing … where unemployment goes up but [the U.S.] is not in a severe recession,” Powell offered, although he admitted that the path to a soft landing narrowed five or six weeks ago.

Explaining the decision to moderate the pace of rate increases, he reminded that monetary policy affects the economy and inflation with certain lags. 

“Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.

“Nobody expected us to raise the rate this much,” he said, “[but] by any standard, inflation remains far too high.” 

Calling ongoing increases “appropriate,” Powell said the Fed would attempt to slow demand growth to give supply time to catch up with demand. “We have more ground to cover.” 

Kate can be reached at [email protected]