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Does Powell’s tough talk mean another 75 bps rate hike?

The Fed is taking "forceful and rapid steps" to moderate demand

Restoring price stability will cause some pain now, but will forestall the greater pain of higher inflation, Federal Reserve Chairman Jerome Powell said in a speech on Friday.

Powell, speaking at an economic policy symposium in Jackson Hole, Wyoming, made it clear that the Federal Open Market Committee (FOMC) would continue to be tightly focused on bringing inflation back down to its 2% goal. Although he didn’t specify how high the FOMC might raise the federal funds rate at their September meeting, markets reacted to the comments by falling sharply on Friday morning.

Powell noted that inflation was still running “well above 2%” and that although July’s numbers were better, “a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.”

The Fed raised the federal funds rate by 75 bps in both June and July, driving mortgage rates sharply higher to more than 6% in a short period. The big question is whether we should expect a repeat in September.

“July’s increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting. We are now about halfway through the intermeeting period. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.”

HousingWire Lead Analyst Logan Mohtashami said that while housing isn’t the main focus of the Fed’s actions, it wants to fight back against the housing market’s perception that the Fed will cut rates next year as the market gets weaker.

“I think the Federal Reserve is frustrated that total housing inventory is not back to 2019 levels, even though mortgage rates have gone as high as 6%. They are frustrated and the fact that new home listings are now declining can’t be encouraging to them,” Mohtashami said. “Powell’s comments reaffirm their stance that they will hike rates and keep them high while looking to see what happens next.”

Powell’s short remarks emphasized the Fed’s responsibility to achieve price stability, calling it “the bedrock of our economy.”

“Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all,” Powell said.

“Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” Powell said.

The Fed Chair said that public expectations of continued higher inflation can become a self-fulfilling prophecy. “During the 1970s, as inflation climbed, the anticipation of high inflation became entrenched in the economic decision-making of households and businesses. The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions.”

Powell ended the speech by noting the Fed’s resolve. “We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.”

We’re covering this important topic at our HousingWire Annual event Oct. 3-5.Register here to join us in Scottsdale, Arizona.

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