US Federal Reserve holds interest rates, sees first rise in 2023 – business live

Q: If you raise rates, you slow the economy, and the Fed has a history of sometimes going too far....

Jerome Powell says the Fed has to follow its dual mandate, of maximum employment and price stability. Often they pull in the same direction, he points out.

(but often they don’t, as raising borrowing costs to control inflation hits activity, meaning higher unemployment).

But right now, Powell says, the economy is recovering from a deep hole, an unusual hole, to do with shutting down the economy.

It turns out it’s a heck of a lot easier to create demand than it is to bring supply back up to snuff. That’s happening all over the world. There’s no reason to think that will last indefinitely.

That was the end of the press conference.

Our current situation is that many millions of people are still unemployed, while inflation is running over target, says Jerome Powell, when asked about the Fed’s monetary policy framework.

So the challenges is to separate broad price increases from idiosyncratic factors – it’s not easy to tell which is which in real-time.

It believes that inflation is being lifted by temporary factors, which will wane, although the timing is uncertain, and the Fed will use its tools as appropriate.

Q: Might fears of a ‘taper tantrum’ leave the Fed behind the curve on tightening policy?

Powell insists the Fed will taper (slow its bond buying programme), when it feels the economy has achieved substantial further progress (towards its goals of maximum employment and price stability).

We will communicate very carefully in advance on that. And that’s what we’re doing, he says, declaring:

We will do what we can to avoid a market reaction, but ultimately when we achieve our macroeconomic goal we will taper, as appropriate.

Q: Are we looking at a scenario next year of a slowing US economy with higher inflation?

Powell says the economy isn’t expected to have as much fiscal support in 2022, but growth is still seen meaningfully above the long-term potential economic outlook.

While inflation is seen lower than in 2021 [with core PCE forecast at between 1.7% to 2.5%]

Growth of, say, 3.5% after 7% growth in 2021 would be a great result, Powell insists, and mean significant job creation.

Q: But you’re forecasting a decelerating economy, is there a risk of stagflation?

Powell reiterates that growth will be higher than the long-run potential (estimated at 2%), so it should pull people into jobs, lift wages and encourage business investment.

But yes, there is a risk that inflation will be higher than the Fed expects, as it doesn’t have certainty over the timing or extent of the effects caused by reopening the economy.

But, the underlying forces around the globe that have been pushing inflation lower over a quarter of a century are intact – such as aging populations, low productivity, and globalisation.

So if inflation proves higher, or more persistent, the Fed will use its tools, he adds.

Jerome Powell says it’s too early to declare victory in the pandemic, even though cases, hospitalisations and deaths in the US have declined sharply.

He points out that the UK, which has at least as high vaccination rates as the US, has suffered an outbreak of the Delta variant, and had to react (by postponing the end of restrictions by a month).

We are not out of the woods and it would be premature to declare victory, Powell says. It would be good to see vaccination rates at a substantially higher level. That can only help.

It’s so great to see the economy open again, and people living their lives again. It appears to be safe, but I’d encourage people to get vaccinated, the Fed chair concludes.

Back on the labor market…. Jerome Powell says a ‘slew’ of retirements may have hit participation rates.

And on wages, he says pay is going up – that’s natural in a strong economy – but the Fed isn’t seeing anything “troubling”.

Namely, it’s not seeing wages at “unsustainable levels” across the economy, ahead of productivity and inflation, which are forcing firms to keep raising prices (this was the classic wage-price spiral that fuelled inflation in the past).

Instead, wage are high among new starters, many in low-skill jobs, Powell adds (reflecting the scramble to hire staff).

Supply and demand aren’t matched up well, but in a flexible economy this should resolve itself in the coming months, Powell continues.

There’s still a big group of unemployed people, he concludes, and the Fed haven’t forgotten them. And there’s every reason to think we’ll be in a strong labor market pretty quickly.

Jerome Powell is sounding somewhat dovish – insisting that the dot plot chart is not a great forecaster of future interest rate moves.

They are individual projections – they’re not a committee forecast, or a plan, the Fed chair insists during his press conference.

“Dots are to be taken with a big grain of salt”, he insists [reminder: the dots now show that a rate rise is broadly predicted by FOMC officials in 2023]

Here’s Bloomberg’s explanation:

The Federal Reserve’s so-called dot plot, which the U.S. central bank uses to signal its outlook for the path of interest rates, shows that officials expect no change in policy this year, while leaning toward two rate increases by the end of 2023, based on median estimates.

The Fed on Wednesday kept its benchmark rate on hold for a 10th straight meeting after sweeping into emergency action amid the coronavirus pandemic in March of last year with a full percentage-point cut.

On the issue of when to taper the Fed’s bond-buying stimulus, Powell says this week’s meeting was the ‘talking about, talking about’ meeting — a term he’s now like to retire.

So the FOMC will continue to assess progress in the economy.

And it will be appropriate to consider a tapering plan at coming meeting, if the progress continues….. but he won’t lay our any numbers that would define the ‘substantial future progress’ the Fed is looking for.

Why hasn’t hiring been faster, given there are a record number of vacancies (over nine million)?

Jerome Powell says there are several factors — including a skills mismatch between the jobs available and the people looking for work; some people being reluctant to return to customer-facing roles due to Covid-19, and childcare responsibilities, which might ease once schools and childcare centres reopen in the fall.

He also says that the enhanced unemployment insurance for 15 million people will end or be diminished by the end of September, which may encourage some people to return to the labor market (some states have already ended this extra $300/week support).

Fed chair Powell adds the inflation could turn out to be higher and more persistent than the FOMC expects.

On the pandemic, he points out that the Covid-19 vaccination programme has slowed, and new strains of the new virus remain a risk.

And on rates… he says that many FOMC policymakers now see the conditions for ‘lift off’ being met sooner than previously thought (which is why today’s ‘dot plot’ shows an earlier rate rise).

But that lift off would mean that the economy is strong, and the ‘substantial further progress’ which the Fed is looking for is still a way off, he adds.

Inflation has increased notably in recent months, and is likely to remain elevated in coming months before moderating, Powell continues.

This is partly because very low readings in the pandemic have fallen out of the calculations, and because of higher oil prices.

He also points to upward pressure from the rebound in spending, and supply chain bottlenecks.

Jerome Powell, the Chair of the Federal Reserve, is speaking now.

He says Fed policy will continue to deliver powerful support to the economy. He warns that the recovery is incomplete, with risks remaining.

And he points out that the pace of recovery in the labor market has been uneven, saying:

The economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been hardest hit.

Despite progress, joblessness continues to fall disproportionately on lower-paid service sector workers, and on African American and Hispanic people, Powell adds.