Jay Powell says June rate pause ‘prudent’ but US inflation battle not over

Jay Powell defended the Federal Reserve’s decision to forgo an interest rate rise at its recent policy meeting, but signalled that the battle against inflation is not yet finished at a high-stakes congressional appearance on Wednesday.

Powell, chair of the US central bank, told lawmakers on the House financial services committee that skipping a rate rise last week was “prudent” given “how far and how fast” the Fed has lifted its benchmark rate since March 2022. In just over a year, the federal funds rate has risen from near-zero to a range of 5 to 5.25 per cent.

The “full effects of monetary restraint” will take time to be realised, Powell said on the first of two days of semi-annual testimony to Congress. He also highlighted that the tightening in credit standards following the collapse of Silicon Valley Bank in March could cause “headwinds” for the world’s largest economy.

However, Powell hinted that the central bank still has more to do in terms of squeezing the economy in order to get inflation under control.

“Inflation has moderated somewhat since the middle of last year,” he said. “Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2 per cent has a long way to go.”

His comments come on the heels of the Fed’s latest policy meeting last week at which officials opted to hold rates steady after 10 consecutive increases in order to better assess how much further the central bank will need to raise borrowing costs in order to tame stubbornly high inflation.

Powell last week billed the move as both “reasonable” and “common sense” as he was forced to defend the Fed’s decision to pause what has become the most aggressive monetary tightening campaign in decades at a time when inflation concerns remain rampant.

Despite staying pat at the latest meeting, Fed officials signalled, in the latest “dot plot” of individual projections, their support for two more quarter-point rate rises this year. And Powell hinted at the time that the first of those could come as early as the next policy gathering in July.

If both increases are implemented, that would ultimately raise the funds rate to 5.5 to 5.75 per cent. No cuts are expected until 2024.

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Democratic lawmakers pressed Powell on the economic pain associated with the Fed’s efforts to stamp out inflation. Most Fed officials now expect more robust growth this year than three months ago, according to projections released last week, but the unemployment rate is still expected to peak nearly 1 percentage point higher than its current level of 3.7 per cent. An increase of that magnitude is typically associated with a recession.

Republicans, meanwhile, questioned Powell about the decision to pause the monetary tightening campaign amid relentless concerns about price pressures. Patrick McHenry, the chair of the House committee, urged the Fed to maintain its “resolve” in fighting inflation. He also criticised the central bank for supervisory failures related to SVB’s implosion, warning that at a time of such acute uncertainty about the economic outlook, changes to the Fed’s regulatory approach is the “last thing a well-capitalised banking system needs”.

In the latest forecasts, policymakers at the Fed revised lower their expectations for how quickly “core” inflation, which strips out food and energy prices, will descend this year. Most now expect it to moderate to just 3.9 per cent by the end of the year, 0.3 percentage points more than what was pencilled in March. It has hovered around 4.7 per cent in recent months.