Inflation remains too high and signs indicate the economy is not cooling as expected, according to Federal Reserve Chair Jerome Powell. The Fed is prepared to raise interest rates further and hold policy at restrictive levels until inflation downward sustainably. The “rebalancing’ of the labor market is expected to continue.
“So far this year, GDP (gross domestic product) growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust,” Powell said in a speech at the “Structural Shifts in the Global Economy” policy symposium Aug. 25 in Jackson Hole, Wyoming.
The housing sector shows signs of picking back up over the past 18 months, and evidence of persistent above-trend growth could put further progress on inflation at risk.
However, Powell did note progress, with inflation peaking at 7% in June 2022 and declining to 3.3% in July.
Still, “getting inflation sustainably back down to 2% is expected to require a period of below-trend economic growth as well as some softening in labor market conditions,” he said.
The labor market rebalancing is expected to continue toward a normalization in labor market conditions, Powell said. Already, demand for labor has moderated, job openings are high but trending down, payroll job growth has slowed and the average workweek has declined.
Price stability is needed to sustain strong labor market conditions forward, Powell said, and the Fed is trying to walk a line between doing too much and too little or too much.
“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,” he said.