Powell: Fed will keep rates higher longer to reduce inflation

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WASHINGTON (AP) — The Federal Reserve will push rates higher than expected and hold them for an extended period, Chairman Jerome Powell said Wednesday, in remarks likely meant to underscore the Fed’s steadfast focus on fighting the coronavirus crisis. persistent inflation.

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Powell also signaled in a written speech to the Brookings Institution that the Fed may raise its key rate by a smaller increment at its December meeting, by just half a point, after four straight three-quarter point hikes. . But Powell also stressed that the smaller rise should not be taken as a sign that the Fed will soon give up its fight against inflation.

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“Restoring price stability is likely to require keeping (interest rates) restrictive for some time,” Powell said. « History strongly cautions against premature policy easing. »

Powell acknowledged that there had been good news on the inflation front, with the cost of goods such as cars, furniture and appliances falling. He also said rents and other housing costs – which make up about a third of the consumer price index – are expected to fall next year.

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But the cost of services, which includes restaurants, travel and healthcare, continues to rise at a rapid rate and is likely to be much harder to control, he said.

« Despite some promising developments, we still have a long way to go to restore price stability, » Powell said.

Service costs are being pushed up mainly by rising wages, he added, which rose at the fastest rate in four decades, before adjusting to inflation. Powell said the robust wage gains are largely due to a labor shortage that began during the pandemic and isn’t expected to subside anytime soon.

The lack of workers reflects a rise in early retirements, the deaths of hundreds of thousands of working-age people from COVID-19, a sharp drop in immigration and slowing population growth, it said. he declared.

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“Wage growth remains well above levels that would be consistent with 2% inflation over time,” Powell said.

Last month’s inflation report showed prices rose 7.7% in October from a year earlier, putting a strain on many families’ budgets. However, this is down from the peak of 9.1% reached in June.

The Fed has raised its key rate six times this year, to a range of 3.75% to 4%, the highest in 15 years. These increases have pushed up mortgage rates sharply, causing home sales to plummet and the cost of most other consumer and business loans to rise.

Fed officials predicted in September that they would eventually push their short-term rate into a range of 4.5% to 4.75% by next year. Powell suggested rates will likely go higher than that. Instead, many economists expect the Fed’s key rate to rise at least 5% to 5.25%.

Fed officials hope that by tightening credit, they can slow consumer and business spending, reduce hiring and wage growth, and calm inflation. Powell said the Fed’s efforts have slowed demand and will need to sustain it « for an extended period. »

At the Fed’s last meeting in November, it raised rates by three-quarters of a point for the fourth consecutive time. But Powell signaled at the time that his next raise would likely be just half a point, still a significant advance. Typically, the central bank changes interest rates in quarter-point increments.