Federal Reserve Chair Jerome H. Powell said Thursday that he expected a slower pace of rate hikes after central bankers refrained from raising interest rates for the first time in 11 monetary policy meetings in June — but he didn’t rule it out that officials could return to back-to-back rate hikes.
“We may not move to a meeting and then move at a meeting,” Powell said.
At a conference in Madrid, he reiterated a claim he had made a day earlier that he would not “take the table off” future wage increases at successive meetings. However, he added that he would assume a more patient approach.
“We held a meeting where we didn’t move, so that’s a slowdown in a way,” he explained. “So I expect something like this to continue, assuming the economy develops roughly as expected.”
However, Mr Powell noted that the economy “has a tendency to do something different” than policymakers expect.
Fed officials raised interest rates rapidly in 2022, conducting a series of three-quarter-point hikes. They slowed to half a percentage point late last year and are increasingly moving towards smaller and now more erratic adjustments.
Raising interest rates is like stepping on the brakes on economic growth: it slows down consumer and corporate demand to bring down inflation. A slower lift rate is like applying less force to the brake pedal. Fed officials are still reining in the economy but are trying to avoid an unnecessary halt.
The Fed’s central bankers currently expect to raise their key interest rate twice more in 2023, from just over 5 percent to just over 5.5 percent. If these moves come in sync with all other meetings, it could lead to rate hikes at the July and November central bank meetings.
But considerable uncertainty clouds this forecast. The probability of two further interest rate hikes before the end of the year is low, albeit increasing. You’re betting that the Fed is more likely to hike just one more rate in 2023 as the economy slows and inflation cools.
Mr. Powell noted that the Fed has repeatedly gone the other way wrong, overestimating how quickly inflationary gains are decelerating.
“We have all seen time and time again that inflation has been longer and stronger than we expected,” he said.
“An interest rate of 5 percent would have been unthinkable before the pandemic,” he later added. “And now the question is: is this policy strict enough?”