Powell, Fed: Rate increases may still be necessary despite the strong economy

Fed Chair Jerome Powell said on Thursday that the robust U.S. economy and the country's still-tight labour markets may merit additional Federal Reserve interest rate rises, defying market expectations that the U.S. central bank's rate hikes were coming to a stop.

"Recent data demonstrating the tenacity of economic growth and labour demand have our attention. Powell said in a speech to the Economic Club of New York that additional indications of consistently above-trend growth or that labour market tightness is not abating could jeopardise future progress on inflation and could call for further tightening of monetary policy.

It "is likely to require a period of below-trend growth and some further softening in labour market conditions," Powell said, for inflation to sustainably return to the Fed's 2% target.

Since the Fed started raising interest rates in March 2022, the unemployment rate has barely changed from its current level of 3.8%, well below the 1.8% annual growth rate that Fed officials believe to be the economy's underlying potential.

Powell stated that the Fed is "proceeding carefully" in determining whether or not there is a need for any additional rate rises, which is likely to maintain existing expectations that the Fed would maintain its benchmark policy rate at the current range of 5.25% to 5.5% at the upcoming meeting.

According to Powell, there are signs the labour market is slowing down, with some significant metrics returning to levels from even before the pandemic.

As the Fed attempts to strike a balance between the threat of allowing inflation to rekindle and the threat of relying on the economy more than is required, Powell also pointed out a number of new "uncertainties and risks" that need to be taken into consideration.

New geopolitical risks to the economy stemming from the "horrifying" attack on Israel by the Palestinian militant organisation Hamas are among them, according to Powell.

The Fed chair also emphasised a recurring theme at the American central bank: despite steady success in bringing down inflation, the fight is far from done. Additional rate rises are still a possibility, and it is unclear how long tight monetary conditions will last.

To conclude, Powell noted the progress made since inflation peaked last year but also noted that one of the Fed's main measures of inflation remained at 3.7% through September, nearly twice the central bank's target. "Inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably towards our goal," he said.

(Sources: investing.com, reuters.com)