Fed Chair warns of high inflation, hints at further rate increases.

The ​U.S. Federal Reserve’s Battle ‌with Inflation

The U.S. Federal Reserve may need to raise interest rates further to ensure inflation⁤ is contained, Federal Reserve chair ‍Jerome Powell said on Friday in remarks‍ that ‍balanced declines in the pace of price increases over the past year with the surprising overperformance of the ⁤U.S. economy.

Powell⁤ said Fed policymakers would “proceed carefully as we decide whether to⁤ tighten further,” but also made clear⁤ that the central bank has ⁢not yet concluded that its benchmark interest rate is high enough to be sure that‍ inflation returns to the 2 percent⁤ target.

“It is the Fed’s job ‌to bring‍ inflation down to ⁣our 2 percent goal, and we​ will do so,” Powell said. “We have tightened policy significantly over ‍the past year. Although inflation⁤ has moved down from its peak—a welcome development—it ⁢remains ​too high. ‍We are prepared to raise rates further if appropriate, and intend ⁤to hold policy at a restrictive level until we ⁢are confident that ‌inflation ‌is ⁢moving‌ sustainably down toward our objective.”

In ⁢that context, recent‍ data has raised ⁣a ⁤new concern, he said.

“We are attentive to signs that the ⁣economy may not be‍ cooling as expected,” with consumer​ spending “especially robust” and the housing sector‌ possibly rebounding, Powell said.

The economy continues to grow above trend, Powell said, and if that continues “it could put further progress⁤ on inflation at ⁢risk and could warrant further tightening of ​monetary policy.”

His remarks showed the Fed wrestling with conflicting signals ​from an economy where‍ inflation has by some readings slowed a lot without much cost⁤ to the ‍economy—a good outcome, but one ⁣that has⁢ raised the possibility that Fed policy is not restrictive ⁤enough to complete the job.

It was difficult, he said, to know​ with ⁢precision the degree ​to ⁢which ‍the Fed’s current ⁣5.25 percent to 5.5 percent benchmark interest ‌rate ​had ⁢cleared the “neutral” rate of ⁣interest needed to slow ‍the economy, and therefore hard to assess just ⁣where policy stands.

Powell repeated what has become ⁤a standard ‍Fed diagnosis⁢ of inflation progress—with a pandemic-era ⁤jump ⁢in⁢ goods inflation easing and a decline in⁤ housing inflation “in the pipeline,” but ‍concern that continued consumer spending on ⁢a broad array ⁢of services and⁣ a ​tight⁢ labor market may⁤ make a return to ⁣2 percent difficult.

A ‌recent decline in measures of underlying inflation, stripped of food and energy prices,‌ “were ⁤welcome, but two months ⁣of good data are only the beginning of⁤ what it will take⁢ to build ⁤confidence that inflation is moving down sustainably,” Powell said.

“Given the size” of ‍the⁤ broader services sector, excluding housing, “some further ⁣progress will be essential,” the Fed chief said, and it will likely require​ an economic slowdown to deliver it.

“Restrictive ​monetary policy will likely​ play an​ increasingly important role. Getting inflation sustainably back down to 2% is expected to require a period of below-trend ⁢economic growth as well as​ some softening ‍in ‌labor ‍market conditions,” ​ Powell said.

“Two percent is and‍ will remain our inflation target,” Powell said. “We are committed to achieving and sustaining a stance of monetary ‍policy that is‌ sufficiently restrictive⁣ to bring ⁢inflation⁣ down to that level over time.”

(Reporting by Howard Schneider; editing by‍ Andrea⁣ Ricci)