Fed Chair Recalls Inflation ‘Head Fakes,’ Pledges to Do More if Needed

Jerome H. Powell, the chair of the Federal Reserve, on Thursday expressed little urgency to make another interest rate increase. But he made clear that policymakers remain willing to adjust policy further if doing so proves necessary to cool the economy and fully restrain inflation.

Mr. Powell and his Fed colleagues left their interest rates unchanged in a range of 5.25 to 5.5 percent earlier this month, up from near-zero as recently as March 2022. The Fed has raised borrowing costs over the past year and a half to wrangle rapid inflation by slowing demand across the economy.

Because inflation has faded notably from its peak in the summer of 2022 — and because the Fed has already adjusted policy so much — officials are now debating whether they might be done. Once they think that rates are at a sufficiently elevated level, they plan to leave them there for a time, essentially putting steady pressure on the economy.

Mr. Powell, speaking from remarks prepared for a research conference hosted by the International Monetary Fund, reiterated on Thursday that policymakers want to make sure that rates are sufficiently restrictive. He said Fed officials are still “not confident that we have achieved such a stance.”

“We are attentive to the risk that stronger growth could undermine further progress in restoring balance to the labor market and in bringing inflation down,” Mr. Powell said, adding that such a situation could “warrant a response from monetary policy.”

The Fed chair also made clear that the central bank does not want to take a continued steady slowdown in inflation for granted. While the Fed’s preferred inflation measure has cooled to 3.4 percent from above 7 percent last year, squeezing price increases back the central bank’s 2 percent goal could still prove to be a bumpy process. Much of the added inflation that remains is coming from stubborn service prices.

“We know that ongoing progress toward our 2 percent goal is not assured: Inflation has given us a few head fakes,” Mr. Powell said. “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”

But the Fed does not want to raise interest rates blindly. It takes time for monetary policy changes to have their full effect on the economy, so the Fed could crimp the economy more painfully than it wants to if it raises rates quickly and without trying to calibrate the moves.

While central bankers want to cool the economy to bring down inflation, they would like to avoid causing a recession in the process.

“We will continue to move carefully,” Mr. Powell said. He said that would allow officials “to address both the risk of being misled by a few good months of data, and the risk of over-tightening.”

The risk of overdoing it is why central bankers are contemplating whether they need to make another move, or whether inflation is on a steady path back to normal.

While officials thought that one final rate increase might be necessary as of their September economic projections, investors doubt that they will raise rates again in the coming months. In fact, market pricing suggests that the Fed could start cutting interest rates as soon as the middle of next year.

Mr. Powell, who will take questions, did not use his prepared remarks to push back aggressively on that market pricing. As a result, investors may embrace his remarks as a sign that policymakers are in no hurry to raise interest rates again. Markets are betting there is only a sliver of a chance that the Fed will adjust policy at its final meeting of 2023, which concludes on Dec. 13.

Mr. Powell also used his speech to discuss some longer-term issues in monetary policy, including whether interest rates, which had lingered near rock-bottom levels for much of the decade preceding the pandemic, will eventually return to a much lower setting.

Some economists have speculated that borrowing costs might remain permanently higher than they were in the years following the deep 2007-9 recession. But Mr. Powell said it is too early to know, and that Fed researchers would ponder the question as part of their next long-run policy review.

“We will begin our next five-year review in the latter half of 2024 and announce the results about a year later,” Mr. Powell explained.

The last review concluded in 2020 and was focused on how to set policy in a low-interest rate world, a backdrop that quickly changed with the advent of rapid inflation in 2021.