Fed Chair Recalls Inflation ‘Head Fakes’ and Pledges to Do More if Needed

Jerome H. Powell, the chair of the Federal Reserve, on Thursday expressed little urgency to make another interest rate increase imminently — but he reiterated that officials would adjust policy further if doing so proved necessary to cool the economy and fully restrain inflation.

Mr. Powell and his Fed colleagues left interest rates unchanged in a range of 5.25 to 5.5 percent this month, up from near zero as recently as March 2022. The Fed has raised borrowing costs over the past year and a half to wrangle rapid inflation by slowing demand across the economy.

Because inflation has faded notably from its peak in the summer of 2022, and because the Fed has already adjusted policy so much, officials are debating whether they might be done. Once they think rates are at a sufficiently elevated level, they plan to leave them there for a time, essentially putting steady pressure on the economy.

Mr. Powell, speaking at a research conference in Washington hosted by the International Monetary Fund, reiterated on Thursday that policymakers wanted to make sure that rates were sufficiently restrictive. He said Fed officials were “not confident that we have achieved such a stance” yet.

“We’re trying to make a judgment, at this point, about whether we need to do more,” Mr. Powell said in response to a question at the event. “We don’t want to go too far, but at the same time, we know that the biggest mistake we could make would be, really, to fail to get inflation under control.”

He made clear that the Fed did not want to take a continued steady slowdown in inflation for granted. While the Fed’s preferred inflation measure has cooled to 3.4 percent from above 7 percent last year, squeezing price increases back to the central bank’s 2 percent goal could still prove to be a bumpy process. Much of the added inflation that remains is coming from stubborn service prices.

“We know that ongoing progress toward our 2 percent goal is not assured: Inflation has given us a few head fakes,” Mr. Powell said. “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”

But the Fed does not want to raise interest rates blindly. It takes time for monetary policy changes to have their full effect on the economy, so the Fed could crimp the economy more painfully than it wants to if it raises rates quickly and without trying to calibrate the moves.

While central bankers want to cool the economy to bring down inflation, they would like to avoid causing a recession in the process.

“We will continue to move carefully,” Mr. Powell said. He said that would allow officials “to address both the risk of being misled by a few good months of data and the risk of over-tightening.”

The risk of overdoing it is why central bankers are contemplating whether they need to make another move, or whether inflation is on a steady path back to normal.

As of their September economic projections, officials thought that one final rate increase might be necessary, investors doubt that they will raise rates again in the coming months. In fact, market pricing suggests that the Fed could start cutting interest rates as soon as the middle of next year.

Markets are betting there is only a sliver of a chance that the Fed will adjust policy at its final meeting of 2023, which will conclude on Dec. 13, and Mr. Powell did little to signal that a rate increase is imminent.

Still, his remarks pushed back on the growing conviction among investors that the central bank is decisively finished.

“We still believe the Fed is done hiking for this cycle, but today’s speech should serve as notice that their rhetoric must stay hawkish until they’ve seen further improvement in inflation,” Michael Feroli, chief U.S. economist at J.P. Morgan, wrote in a research note.

Some economists have been anticipating that a recent jump in longer-term interest rates might persuade the Fed to hold off on raising borrowing costs again. While the Fed sets shorter-term interest rates, longer-term ones are based on market movements and can take time to adjust — but when they do, mortgages, business loans and other types of borrowing become more expensive.

Fed officials are watching market moves, including whether they last and what is causing them, Mr. Powell acknowledged. He said officials would watch how the moves shaped up.

“We’re moving carefully now, we’ve moved very fast, and rates are now restrictive,” Mr. Powell said. “It’s not something we’re trying to make a decision on right now.”

He also used his speech to discuss some longer-term issues in monetary policy, including whether interest rates, which had lingered near rock-bottom levels for much of the decade preceding the pandemic, will eventually return to a much lower setting.

Some economists have speculated that borrowing costs might remain permanently higher than they were in the years after the deep 2007-9 recession. But Mr. Powell said that it was too early to know, and that Fed researchers would ponder the question as part of their next long-run policy review.

“We will begin our next five-year review in the latter half of 2024 and announce the results about a year later,” Mr. Powell explained.

The last review concluded in 2020 and was focused on how to set policy in a low-interest rate world, a backdrop that quickly changed with the advent of rapid inflation in 2021.