Taming inflation will take ‘significant period’, Fed Reserve chair warns

Jay Powell, the chair of the Federal Reserve, said reducing inflation would still take a “significant period of time” as he pointed to the need for additional interest rate increases in the face of stronger labour market data.

Powell’s comments on Tuesday were his first since data unexpectedly showed a jump in job growth in January, which suggested the US central bank might have to go further in its monetary tightening to cool down the economy.

The Fed has lifted its main interest rate from near-zero to a target range between 4.5 and 4.75 per cent in less than a year. Last week, it slowed the pace of its rate increases to 25 basis points from 50 at the end of last year and 75 before that, suggesting its most aggressive efforts to tame inflation were behind it.

[ US Federal Reserve increases benchmark rate by a quarter of percentage point ]

[ US unexpectedly adds 517,000 jobs in January ]

But Powell said the “disinflationary process” still had a “long way to go” and was still in its early stages. “It’s probably going to be bumpy,” he said in remarks at the Economic Club of Washington DC.

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Powell stressed that Fed policy would be dependent on incoming economic figures but the central bank would “certainly raise rates more” if data continued to be “stronger than we expect”.

In recent days, other Fed officials have also pointed to the enduring strength of the labour market as a reason for the central bank to keep pressing ahead with tightening.

“It’ll probably mean we have to do a little more work,” Raphael Bostic, the president of the Atlanta Fed, told Bloomberg News. “And I would expect that that would translate into us raising interest rates more than I have projected right now.”

Meanwhile, Bank of Canada governor Tiff Macklem reiterated the central bank’s plans to pause increases of its benchmark interest rate due to the risk of slowing the economy “too much,” doubling down on a dovish message that contrasts with the Federal Reserve’s approach.

[ IMF forecasts stronger global growth as inflation eases ]

Macklem told an audience in Quebec City on Tuesday that the bank would allow its monetary tightening over the past year to fully work through the economy. It has increased the benchmark rate by 4.25 percentage points since March 2022 in an effort to cool persistent inflation.

“We don’t see the full effects of changes in our [benchmark] rate for 18-24 months,” Macklem said. “In other words, we shouldn’t keep raising rates until inflation is back to 2 per cent. Instead, we need to pause rate hikes before we slow the economy and inflation too much.” – Copyright The Financial Times Limited 2023