Federal Reserve Board Chairman Jerome Powell has made himself and Fed guidelines clear. Although the board voted in June to pause the pattern of raising interest rates, policymakers aren’t finished with their anti-inflation efforts and will likely raise rates again before they’re done.
Mr. Powell explained that the June pause was just that—a “skip” is how he termed it. A continuation of the effort to quell inflationary pressures and bring inflation’s pace back down to the target of 2 percent per year will likely involve more interest rate hikes in the coming months. For those anxious to see an end to this pattern, Mr. Powell did offer this: Interest rates are getting close to their final destination in this anti-inflation effort, he said, although he wisely refused to put a figure on that destination.
Up to this point, the Fed had followed what could only be described as a very aggressive strategy on interest rates. That aggressiveness is easily explained. The Fed wasted valuable time in 2021. Back then, as inflationary pressures gained momentum, Mr. Powell insisted that inflation wasn’t a problem. He stuck with inflationary monetary policies, including the maintenance of ordinately low interest rates.
Things changed in March 2022 after Mr. Powell received a reappointment as Fed chair. He and the Fed seemed suddenly awake to the inflation problem. Monetary policymakers began to raise interest rates and otherwise take steps to tighten credit conditions. Mr. Powell and his colleagues were clearly playing a game of catchup for what they failed to do in 2021. Over the succeeding 13 months to April, they rapidly raised the target federal funds rate by 5 full percentage points, faster than it had in more than 40 years.
Now the Fed has paused. Mr. Powell’s explanation should come as no surprise to readers of this column. Contrary to media speculation, the Fed had no desire to use interest rate policy to protect troubled banks. Neither were policymakers using the pause to signal a turn to rate reductions, as some on Wall Street suggested after allowing their hopes to confuse their expectations.
Instead, policymakers, aware that past aggressive interest rate hikes would likely have an uneven and delayed impact on the economy and inflation, wanted time to assess those effects. In Mr. Powell’s words, the decision to pause and impart a more measured pace to rate increases “gives us [policymakers] more information to ... make better decisions.”
Before the July 25 to July 26 meeting, Fed policymakers will have new figures on jobs and inflation, as well as a look at banks’ quarterly earnings. They'll use these to make their next move. Unless these new data offer a huge surprise, Mr. Powell has made clear that another rate hike is likely. The minutes that accompanied the Fed’s latest forecast show that 12 of 18 board members favor at least two more interest hikes. Assuming those increases are the same as the 0.25 percentage point increase of April, that action would bring the target federal funds rate into the range of 5.5 to 5.75 percent.
However, whether such moves would bring rates to the “final destination” to which Mr. Powell alluded remains an open question. Mr. Powell wisely avoided defining that point, mainly because he knew that he couldn’t yet know it. It all depends on the path of inflation—always uneven—and the unfolding state of the economy. If history is any guide—and it’s the only guide readers and the Fed have—a satisfactory inflation-quelling level for the target federal funds rate would be some 2 percentage points above the ongoing inflation rate. Should inflation continue at the relatively moderate 4 percent of recent reports, then two or maybe three more rate hikes might just bring the Fed to the chairman’s destination. But there are no assurances. If inflation gains momentum or the economy lurches, there could be more. Or there could be less if the economy collapses. No one can know, including the Fed.
In recognition of such unavoidable uncertainties, the nation and investors are fortunate to have Mr. Powell as the head of the Fed. At least lucky to have him instead of one of his predecessors, Ben Bernanke. Mr. Bernanke, heedless of ever-present uncertainties, broadcast the Fed’s intentions as if he and his team could really see the future. Because no one can do that, the Fed under Mr. Bernanke would then stick to its forecast even when circumstances demanded a change or whipsaw markets by going back on what the Fed had promised it would do. If Mr. Powell made a grave error in 2021, he now offers more realism about policy than markets have received in a long time.
