Fed Chair Powell Says ‘Long Way to Go’ in Inflation Fight, Calls US Debt ‘Unsustainable’

Federal Reserve Board Chairman Jerome Powell speaks during an interview by David Rubenstein, Chairman of the Economic Club of Washington, D.C., at the Renaissance Hotel in Washington on Feb. 7, 2023. Julia Nikhinson/Getty Images

The United States is watching disinflation travel through the national economy, but “it has a long way to go” before price stability is achieved, says Federal Reserve Chair Jerome Powell.

Speaking at the Economic Club of Washington on Tuesday, the Fed chair acknowledged that the country is in the “very early stages of disinflation.” However, many parts of the marketplace are still experiencing elevated inflation, he said, alluding to the services sector.

In December, services inflation climbed to 7.5 percent year-over-year, according to the Bureau of Labor Statistics. That is the highest level since August 1982.

According to Powell, it is going to take time to return inflation to the central bank’s 2 percent target, and the road to this aim is “probably going to be bumpy.” As a result, he believes that the Fed will need to hold the policy rate at a restrictive level for an extended period.

“We expect 2023 to be a year of significant declines in inflation. It’s actually our job to make sure that that’s the case,” Powell told Carlyle Group co-founder David Rubenstein at the event. “My guess is it will take certainly into not just this year, but next year to get down close to 2 percent.”

Today, the personal consumption expenditure (PCE) price index—the Fed’s preferred inflation measurement—is running at an annualized rate of 5 percent. The core PCE, which strips the volatile food and energy sectors, is running at 4.4 percent.

Traders work on the floor at the New York Stock Exchange as the Federal Reserve chairman Jerome Powell speaks after announcing a rate increase in New York on Nov. 2, 2022. Seth Wenig/AP Photo

Asked if there are any threats to the Fed’s inflation-busting quantitative tightening (QT) campaign, Powell stated there are elements that are out of the central bank’s control—such as the war in Ukraine and the reopening of China’s economy.

Market Reaction

The Fed Chair assured markets that it is not the institution’s goal to surprise investors.

Before Powell’s remarks on Tuesday, the financial markets were treading water. Then, during his speech, the leading benchmark indexes rallied as the Fed chief noted that inflation was declining.

However, stocks turned negative again when investors heard Powell confirm that more rate hikes would likely happen, iterating what was noted in last week’s Federal Open Market Committee (FOMC) policy statement.

“If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in,” he explained.

“I think there’s been an expectation that it‘ll go away quickly and painlessly, and I don’t think that’s at all guaranteed. That’s not the base case,” Powell added. “The base case is ... that it will take some time. And we’ll have to do more rate increases, and then we'll have to look around to see whether we’ve done enough.”

The U.S. economy added 517,000 new jobs in January, topping market estimates. The unemployment rate also fell to 3.4 percent.

The Dow Jones Industrial Average tumbled around 0.6 percent, the S&P 500 dropped roughly 0.4 percent, and the Nasdaq Composite Index slipped 0.25 percent.

Treasurys were mixed, with the benchmark 10-year yield up more than 3 basis points to 3.66 percent.

The U.S. Dollar Index (DXY), which measures the greenback against a basket of currencies, erased its losses and traded flat, hovering at 103.60.

The next FOMC policy meeting will take place on March 21 and 22. It is widely expected that officials will raise the benchmark fed funds rate by 25 basis points to a range of 4.75 percent and 5.00 percent, according to the CME Group FedWatch Tool.

Debt Ceiling

When asked about the U.S. debt ceiling, Powell asserted that this is a fiscal issue that is the responsibility of Congress and the Treasury Department.

Powell hoped that Congress would vote to raise the debt ceiling so the federal government could pay all of its bills. But he noted that the central bank does not possess the “ability to shield the financial markets or the economy from the consequences” of raising the debt limit.

Last month, the U.S. government hit its debt ceiling of $31.4 trillion. Since then, Democrats and Republicans have been at a standstill. The White House stated that there would be no negotiations to increase the debt limit, but GOP lawmakers argue that it is irresponsible to refrain from addressing Washington’s immense spending and debt levels.

Powell purported that the federal government is on an “unsustainable fiscal path.”

“That has been the case for some time, and it’s something we will have to deal with; it is better to deal with it sooner rather than later,” Powell added.