Oct. 19 (UPI) — Federal Reserve Chairman Jerome Powell said on Thursday that he and his fellow board members are determined to bring down inflation to 2% but the persistently robust economy and the potential of spillover overseas conflicts could challenge that.
Powell made the comments at the Economic Club of New York Luncheon, where he commented on the strong retail sales report in September that more than doubled Wall Street estimates that could push up inflation. That report was released on Tuesday.
“Indeed, economic growth has consistently surprised to the upside this year, as most recently seen in the strong retail sales data released earlier this week,” Powell said. “Forecasters generally expect gross domestic product to come in very strong for the third quarter before cooling off in the fourth quarter and next year.
“Still, the record suggests that a sustainable return to our 2% inflation goal is likely to require a period of below-trend growth and some further softening in labor market conditions.”
While not mentioning the conflict in Ukraine by name but pointing out the current fighting in Israel, Powell said the Fed was watching the developments of those closely for possible impact on the economy here.
“Geopolitical tensions are highly elevated and pose important risks to global economic activity. Our institutional role at the Federal Reserve is to monitor these developments for their economic implications, which remain highly uncertain,” Powell said. “Speaking for myself, I found the attack on Israel horrifying, as is the prospect for more loss of innocent lives.”
Powell said while the Fed has been aggressive in trying to lower inflation with higher interest rates for more than a year now, there is still no predictable path forward.
“Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment,” Powell said. “Doing too much could also do unnecessary harm to the economy.”
“Given the uncertainties and risks, and how far we have come, the committee is proceeding carefully. We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.”
Powell’s speech comes at a critical time, as financial markets were expecting a reprieve on rate hikes ahead of the next Fed meeting on Oct. 31, and as yields were booming on the 10-year Treasury bond note.
The yield index rose by 6 basis points to 4.96% on Wednesday, following a four-day rally that pushed the rate closer to the yield’s 5% peak for the first time since 2007.
The 2-year Treasury yield also ticked up 2 basis points to 5.23% on Wednesday.
Yields were rising mostly due to concerns the Fed would move benchmark rates even higher or leave them in place longer in hopes of knocking out inflation in the near term.
Economists also point to rising yields due to factors like a robust economy, strong job market, higher government deficits, and an elevated term premium — which represents the cash cushion investors require as insurance against potential interest rate changes over the life of a bond.
The bond market bottomed out at 0.5% in 2020 as investors fled to risk-free Treasuries during the global pandemic.
In recent months, however, the yields resurged, prompting investors to recalibrate trading prices through 2024 in anticipation of the Federal Reserve’s continued interest rate hikes, coinciding with the recovery of industries since the national health emergency ended in May.
Other Fed policymakers have recently indicated their support for keeping current interest rates intact for as long as inflation remains a concern, while also acknowledging the negative effect of surging Treasury yields, which create a drag on the economy.
Earlier this month, Fed Vice Chair Philip Jefferson laid out that strategy that would see the Fed “balance the risk of not having tightened enough, against the risk of policy being too restrictive,” he said.
In a separate statement, San Francisco Fed President Mary Daly added: “If we continue to see a cooling labor market and inflation heading back to our target, we can hold interest rates steady and let the effects of policy continue to work. Importantly, even if we hold rates where they are today, policy will grow increasingly restrictive as inflation — and inflation expectations — fall.
