- Powell struck a hawkish tone in his Jackson Hole speech but did not commit to further rate hikes.
- Powell noted upside risks to inflation and said that the FOMC would be willing to increase if the fed funds rate if the economy and labor market do not slow.
- PNC expects the FOMC to keep the fed funds rate in its current range into 2024, then cut rates next year as the US economy enters a mild recession.
Fed Chair Jerome Powell struck a hawkish tone in his speech at the annual Jackson Hole monetary policy conference. Powell reiterated his commitment to the central bank’s goal of 2% inflation and said that “we are prepared to raise rates further if appropriate” to bring inflation lower. Powell said that the “process still has a long way to go, even with the more recent favorable readings” on inflation over the past couple of months. In particular, Powell said that the FOMC is not sure “where underlying inflation will settle” in coming quarters.
In getting inflation to 2%, Powell said that “restrictive monetary policy will likely play an increasing role,” leading to below-trend growth and a softer labor market. Powell noted that monetary policy is current weighing on growth and that there “may be significant further drag in the pipeline” from recent monetary tightening. But he also said that monetary policy needs to be “sufficiently restrictive to bring inflation down to that [2%] level over time,” saying that if growth does not weaken as expected, the housing market starts to pick up again, or wage growth does not slow, this “could warrant further tightening in monetary policy.”
In this conclusion, Powell said that “doing too little could allow above-target inflation to persist,” although he noted that “doing too much could also do unnecessary harm to the economy.” He wrapped up by saying that “we will keep at it until the job is done.”
Although Powell forcefully stated the need to get inflation to 2%, he did not commit to further tightening. Instead, he said that monetary policy is currently restrictive, and that recent monetary actions are likely to slow growth further in the near term. But Powell made it clear that the FOMC will be more than willing to raise the Fed funds rate later this year if inflation does not appear to be slowing or if the labor market remains too hot from the Fed’s perspective. And there was absolutely no discussion of when the FOMC might cut the fed funds rate.
This speech is consistent with PNC’s baseline forecast for no further increases in the fed funds rate this year. The labor market should cool off over the rest of 2023 and into 2024, and inflation, particularly core inflation, should gradually ease. PNC expects a mild recession starting in early 2024 as the cumulative impact of tighter monetary policy leads to contraction in interest-rate sensitive sectors like consumer spending on durable goods and business investment spending. PNC then expects the FOMC to start cutting the fed funds rate in the early spring of next year as it becomes apparent that the economy is in recession and inflation is moving to 2%.
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