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Jay Powell does little to dispel expectations of third big rate rise

Jay Powell did little to dispel expectations on Thursday that the Federal Reserve will deliver a third consecutive 0.75 percentage point rate rise, saying the US central bank needed to act “forthrightly” to ensure elevated inflation did not become entrenched.

In his last public remarks before the bank’s policy meeting later this month, the Fed chair doubled down on the hawkish message he delivered at the recent Jackson Hole conference in Wyoming, reiterating that the central bank “has and accepts responsibility for price stability”.

“We need to act now, forthrightly, strongly, as we have been doing and we need to keep at it until the job is done,” he said during a moderated discussion at a conference hosted by the Cato Institute.

His comments come just days before the scheduled “blackout” period ahead of the next gathering of the Federal Open Market Committee, which is set to be held on September 20 and 21, during which public communications are limited.

The blackout begins before the next consumer price index report is released early next week, which economists broadly expect to show an annual inflation rate of 8.1 per cent, down from 8.5 per cent in July.

While no official — including Powell on Thursday — has officially endorsed another supersized rate rise, they have in recent weeks emphasised the momentum propelling the economy and resilience of the labour market, which added 315,000 new positions in August alone.

Lael Brainard, the vice-chair, cautioned on Wednesday that at some point the Fed will need to consider the risks of overtightening monetary policy, and emphasised it will take time for the effects of the central bank’s actions to filter through to the economy. But she also stressed the Fed must “maintain a risk-management posture” to ensure inflation does not get further out of hand.

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Taken together, the recent comments from policymakers have reinforced expectations that the Fed will yet again raise rates by 0.75 percentage points, rather than downshift to a half-point rate rise, in a move that would push the federal funds rate to a new target range of 3 per cent to 3.25 per cent. According to the CME Group, the odds of such move now hover around 86 per cent.

Speaking with reporters also on Thursday, Charles Evans, president of the Chicago Fed and a voting member on the Federal Open Market Committee, said he’ll be monitoring wages and whether the “breadth of inflationary pressures” throughout the CPI report is expanding, which would tip the balance towards a 0.75 percentage point rate rise.

He supports the benchmark policy rate rising to at least 3.5 per cent in the coming months.

Top of mind for Powell and other Fed officials is the cost associated with a situation in which the expectations that households, businesses and market participants have about future price pressures escalate to an extent that they further feed inflationary fears.

This dynamic plagued the Fed in the 1970s, forcing then-chair Paul Volcker to aggressively jack up interest rates and crush the economy more than otherwise would have been necessary in order to restore price stability.

“The clock is ticking,” Powell said on Thursday. “The longer that inflation remains well above target, the greater the concern that the public will start to just naturally incorporate higher inflation into its economic decision-making and our job is to make sure that doesn’t happen.”

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Powell reiterated that as the Fed acted to root out high inflation, the labour market was likely to accrue losses as growth slowed. He also called into question whether the pandemic and the war in Ukraine have prompted structural shifts that may mean price shocks going forward are more frequent.

When asked about the variety of spending bills either signed into law or championed by the Biden administration, Powell demurred from commenting specifically on any legislation, but warned “our federal fiscal policy is not on a sustainable path, and it really hasn’t been for some time”.

“We will need to get back to a sustainable path sooner or later . . . sooner is better than later,” he added.