As Biden Prepares to Tout Economy, Fed Chair Powell Takes a Cautious Tone


WASHINGTON — Jerome H. Powell, the chair of the Federal Reserve, underscored that the central bank has more work to do when it comes to slowing the economy and that officials remain determined to wrestle rapid inflation under control, even if that means pushing rates higher than expected.

Mr. Powell, speaking on Tuesday in a question-and-answer session at the Economic Club of Washington, D.C., called a recent slowdown in price increases “the very early stages of disinflation.” He added that the process of getting inflation back to normal was likely to be bumpy.

“There has been an expectation that it will go away quickly and painlessly — and I don’t think that’s at all guaranteed; that’s not the base case,” Mr. Powell said. “The base case for me is that it will take some time, and we’ll have to do more rate increases, and then we’ll have to look around and see whether we’ve done enough.”

The Fed chair’s comments came hours before President Biden delivered the annual State of the Union address, which offered a contrasting tone.

Democrats are embracing a historically strong economy with super-low unemployment and rapid wage growth, cheering a report last week that showed employers added more than half a million jobs in January. But Fed officials have met the news with more caution. The central bank is supposed to foster both full employment and stable inflation, and policymakers have been concerned that the strength of today’s job market could make it harder for them to return wage and price increases to historically normal levels.

Mr. Powell said that the Fed had not expected the jobs report to be so strong, and that the robustness reinforced why the process of lowering inflation “takes a significant period of time.”

While he said it was good that the disinflation so far had not come at the expense of the labor market, he also underscored that further interest rate moves would be appropriate and that borrowing costs would need to remain high for some time. And he embraced how markets have adjusted in the wake of the strong hiring numbers: Investors had previously expected the Fed to stop adjusting policy very soon, but now see rate increases in both March and May.

“We anticipate that ongoing rate increases will be appropriate,” Mr. Powell said. He said that in the wake of the jobs report, financial conditions were “more well aligned” with that view than they had been previously.

To try to slow the economy and choke off inflation, policymakers raised interest rates from near zero early last year to more than 4.5 percent at their last meeting, the quickest pace of adjustment in decades. Higher borrowing costs weigh on demand by making it more expensive to fund big purchases or business expansions. That in turn tempers hiring and wage growth, with further cools the economy.

Mr. Powell had hinted during a news conference last week that the Fed was discussing a couple of more rate increases and could do more if needed. He also underlined that the central bank would leave interest rates high for some time. But those comments came before the release of a blockbuster January employment report.

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Still, Mr. Powell seemed to reinforce that basic plan on Tuesday, and said that if inflation remained high or the job market stayed strong, “it may well be the case” that the Fed would have to raise rates more than markets currently expected. Stock indexes initially jumped as Mr. Powell spoke, then plummeted, and then jumped again as investors tried to parse his remarks.

“Powell leveraged the employment report to lend credibility to the hawkish elements of the February message,” Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, wrote in response to the speech. Hawkish means tilted toward higher interest rates.

But he “was far from max hawkish,” Mr. Guha continued, explaining why investors were relieved after the speech.

Still, Mr. Powell called getting inflation back down “the biggest challenge” facing the Fed, and noted that in the services sector of the economy — which includes industries such as restaurants, travel and health care — “we’re not seeing disinflation yet.”

Fed officials aim for 2 percent inflation on average over time. Their preferred inflation measure remains much higher than that, at 5 percent, though that is down from a peak of about 7 percent last summer.

Central bankers are quick to acknowledge that the current bout of inflation has not been primarily the result of a strong labor market and climbing wages; it has stemmed from supply chain issues that caused shortages and collided with strong demand fueled partly by government stimulus.

But some worry that a booming economy could keep inflation unusually elevated.

Fed officials have at times said pay gains — which have moderated somewhat but are still climbing around 5.1 percent on a yearly basis in one closely watched quarterly measure, and by 4.4 percent in monthly numbers — would probably need to slow to a range of 3 to 3.5 percent to line up with their inflation goal.

If companies are paying more, they are likely to charge more to try to cover their costs. And as consumers earn more, they may be able to keep spending despite climbing prices.

Some politicians and economists have embraced the recent slowdown in inflation and wage growth as a sign that the Fed might pull off a “soft landing”: cooling the economy enough to drive price increases lower without throwing people out of work.

But Fed officials have been more cautious about whether roaring labor conditions and moderating inflation can continue together indefinitely. Typical economic models suggest that it would be difficult for wages and prices to slow down fully in a labor market this tight.

“The underlying strength of the services sector of the economy is still very robust, and that’s where I think a lot of us are focusing our attention,” Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, said in an interview on CNBC on Tuesday.

Policymakers are intent on returning inflation quickly and firmly to their goal, because they are worried that a long period of rapid price increases could change business and worker behavior in ways that make quick inflation a more permanent feature of the U.S. economy.

Many economists believe that the Fed’s halting response to inflation allowed that kind of entrenchment to happen in the 1970s, which meant that when the Fed did respond decisively in the 1980s, it had to inflict serious pain on the economy to bring inflation under control.


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