Powell Says Fed’s Inflation Fight Could Take Years

The world’s major central banks have an unexpected problem: Their economies are surprisingly strong.

The Federal Reserve is likely to keep lifting interest rates even though officials this month decided to slow the pace of increases by holding off on another move higher, Chair Jerome Powell said Wednesday.

Powell said because the Fed had lifted rates so quickly last year, there hasn’t been enough time to see the effects of those moves in slowing economic activity and inflation.

“Policy hasn’t been restrictive for very long…so we believe there’s more restriction coming,” Powell said during a panel discussion with other central bankers at the European Central Bank’s annual symposium in Sintra, Portugal.

Overall inflation has slowed this year because of falling energy and commodity prices that surged when Russia invaded Ukraine 15 months ago. But central bankers worry because core inflation, which excludes volatile food and energy prices and is deemed a more reliable gauge of future inflation, hasn’t slowed much.

Powell said he doesn’t anticipate core inflation will return to the central bank’s 2% target until 2025.

Central bankers have raised interest rates rapidly over the last year to fight inflation, but have been astonished so far at the resilience of their economies to higher borrowing costs. 

 At their policy meeting this month, Fed officials left the benchmark federal-funds rate in a range between 5% and 5.25% after raising it rapidly at 10 consecutive meetings. Another increase at the Fed’s July 25-26 meeting would take the policy rate to a 22-year high. 

Most officials at the meeting penciled in two more increases this year. “The reason for that was if you look at the data over the last quarter, what you see is stronger than expected growth, tighter than expected labor markets, and higher than expected inflation,” said Powell.

Fed officials see a risk that their past rate increases, together with recent banking-industry stresses, could create a sharper-than-anticipated slowdown. Powell said the failure of three midsize banks this spring had played a part in his desire to space out the Fed’s rate moves.

They are trying to balance that against the risk that the economy proves more resilient than expected and inflation stays too high, requiring them to lift rates higher than they would otherwise.

The Fed raised rates by at least a half percentage point at its last six policy meetings of 2022, but slowed to quarter-point hikes at its first three meetings this year. The decision not to raise rates this month was just a continuation of the Fed’s moderation in the pace of rate rises, Powell said.

Slowing down rate increases, including by possibly raising rates at every other meeting, represents an “effort to get more information from the data to see how much restraint is really coming,” he said.

Powell said the Fed hadn’t made any formal decision to raise rates at every other meeting. “It may work out that way. It may not work out that way,” Powell said. “I wouldn’t take moving at consecutive meetings off the table at all.”

The ECB this month lifted rates by a quarter percentage point, and its president,

Lagarde said she had been surprised by the resilience of Europe’s economy following enormous disruptions to energy markets and trade from Russia’s invasion of Ukraine. “Everybody thought the German model was dead, everyone would be on their knees. Resilience has been demonstrated at every level of society,” Lagarde said.

Unemployment is at a record low in the eurozone and near a multidecade low in the U.K., which is encouraging workers to press for large wage increases.

Last week, the Bank of England raised its key interest rate by a half percentage point, a more aggressive rate rise than its peers as it seeks to curb the highest inflation rate in the Group of Seven wealthy countries.

U.K. consumer prices in May were 8.7% higher than a year earlier, unchanged from April. Before the inflation data was released last week, economists and investors had expected a quarter-point interest-rate increase from the central bank.

“We were predicting a long but shallow recession, but the economy has been resilient,” said Bank of England Gov. Andrew Bailey. That resilience has been accompanied by a very tight labor market and large pay gains, Bailey said.

Investors are expecting several more rate increases in the U.K. “My answer to that is, well, we’ll see,” Bailey said. He suggested investors’ anticipation a higher peak rate “will be quite short lived” could prove incorrect in a world of inflationary pressures.

Meantime, Bank of Japan Gov. Kazuo Ueda said he sees signs the country’s inflation rate is heading toward its 2% target, but isn’t yet confident enough to unwind its monetary easing.

Ueda said the central bank could change course if it becomes more convinced that inflation will be sustainably higher heading into 2024. Japan’s inflation rate has hovered at about 3% or higher since last summer. Core inflation was 3.2% in May.

Ueda pointed to recent increases in wages to suggest the country’s underlying inflation rate is still below 2%.

Write to Nick Timiraos at [email protected] and Tom Fairless at [email protected]