Yet, this week’s publication of fresh batches of data demonstrating the US economy is not cooling as quickly as anticipated made the Fed chair’s projection of uneven progress more palpable.
As a result, Powell and the rest of the Fed are attempting to navigate a potential new economic inflection point that may make their task more challenging and completely derail their expectations and policy plans.
On the one hand, Fed policymakers are more optimistic that they can prevent a sharp slowdown or perhaps a recession in the near future, which means a “soft” landing is still possible. The central bank’s fight against excessive inflation, though, appears far from over, which is more worrying.
It is increasingly likely that the Fed will need to implement even more tightening than anticipated in order to calm the US economy after raising interest rates from near zero to between 4.5 and 4.75 percent over the past year.
Kathy Bostjancic, chief economist of the insurance company Nationwide, remarked that “[the current data] just embolden the Fed to do more.” “I believe the market’s biggest concern right now is how much more? Will they remain at 5.5%? Will it be necessary to go to six? And they are likely to maintain it there for a longer period of time, whatever final rate they reach.
The work that needs to be done has been suggested by current economic data. The consumer price index rose by an unusually moderate 6.4% last month compared to the same month last year, according to numbers released on Tuesday.
The next day, data showed an unexpectedly high increase in monthly retail sales for January, indicating US households were still confident in making large purchases.
These came after a sharp uptick in job creation in January that well above expectations amid a consistently hot labor market. Pricing pressures are also proving to be more difficult to control in industries with notable labor-intensive services, like auto maintenance.
Even though the next Federal Open Market Committee meeting isn’t until the end of March and further jobs and inflation statistics are anticipated before then, economists already believe that central bank officials will increase their projection for the direction of its main interest rate at the meeting.
Fed policymakers predicted a so-called terminal rate of between 5 and 5.25 percent this year in their “dot plot” projection from December, which meant just two quarter-point rate increases in 2023. But, it now seems possible that they could go higher.
According to Michael Feroli, a senior economist at JPMorgan, “very soon they will start preparing those March dots and that terminal rate is going to be rising higher.” The risks of “doing too much or too little” are always being considered by the Fed, he continued, and “their most recent thoughts” will be worries about the latter.
For Powell, who this month marked the fifth anniversary of his appointment as Fed chairman, fresh concerns about the institution’s approach to inflation could be unsettling. The Fed had to play catch-up last year, executing huge rate increases of 75 and 50 basis points when price pressures began to soar in late 2021.
The Fed appeared to be on track by January: the institution was prepared to slow the pace of rate increases to more conventional quarter-point increments, reflecting increased confidence it had in price increases. Nevertheless, during the past week, Fed officials have been forced to switch to more hawkish tone. “It is evident that overall demand continues to be significantly higher than supply, and inflation is significantly higher than our target of 2%. We must bring the economy back into balance when it comes to monetary policy, according to John Williams, president of the New York Fed, on Tuesday. “We’re going to stick with it until we finish the job.”
The Fed can no longer be accused of being behind the curve on price pressures, according to David Wessel, a senior fellow in economic studies at the Brookings Institution. The Fed has restored its credibility in terms of fighting inflation with its campaign of significant interest rate increases over the past year.
Instead, he claimed, the central bank has returned to more traditional policymaking, where decisions would be made based on the data in quarter-point increments.
They have returned to the norm, which is to cross the river while touching the stones with their feet, he said. Rates have been raised significantly, and monetary policy lags. You should exercise caution to avoid doing too much.
Because January data can be extremely untrustworthy, caution may be especially advised because the employment, inflation, and retail sales figures from last month may still change.
According to Ian Shepherdson of Pantheon Macroeconomics, “January was exceptionally mild and relatively unsnowy compared to normal and weather effects like that do not remain.” That doesn’t imply that there is permanent strength.”
The fact that market expectations, which were beginning to price in a more fast conclusion to tightening than the central bank, have changed course and are more in line with the Fed’s views is one positive for Powell in the recent patch of economic growth.
Don Kohn, a former Fed vice-chair, claimed that the market has caught up to the Fed after being somewhat behind the curve.