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The Federal Reserve has signaled its readiness to raise interest rates further, if necessary, to steer inflation towards its 2 percent goal. While the recent trend indicates a gradual decline in inflation rates, the Federal Reserve intends to maintain a restrictive policy stance until it's confident about a sustained reduction in inflation levels, Governor Jerome Powell said in an address.
Powell was speaking at the economic policy symposium “Structural Shifts in the Global Economy,” sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming.
While inflation has begun to taper, the decline hasn't been as rapid as desired. As of July, the headline PCE (personal consumption expenditures) inflation dropped to 3.3 percent, having peaked at 7 percent in June 2022, Powell said. Notably, inflationary effects globally have been influenced primarily by the Russia-Ukraine war since early 2022. However, when taking out the volatile food and energy components, core PCE inflation sat at 4.3 percent in July, having reduced from its peak of 5.4 percent in February 2022.
Inflation related to core goods, especially durable ones like vehicles, has declined notably. Factors such as increased vehicle production, higher interest rates dampening demand, and a resolving semiconductor shortage have played roles. For instance, the motor vehicle sector has seen reduced inflation due to a combination of demand and supply changes, with auto loan interest rates nearly doubling since the early days of the pandemic.
Monetary policy's impact was felt quickly in the housing market. Mortgage rates in 2022 doubled, leading to a decrease in housing starts, sales, and a sharp drop in house price growth.
Accounting for over half of the core PCE index, this segment's inflation has remained relatively flat since the Fed's liftoff. This sector, however, is essential for restoring price stability, making it a key area of focus.
As the world continues to adjust post-pandemic, restrictive monetary policies are set to play an increasing role in controlling inflation. Achieving the 2 percent inflation mark will likely require a period of economic growth below the usual trend and a potential softening in the labor market.
Economic Growth: Despite an expected slowing down of economic growth due to tightened financial conditions, recent data indicates a potential uptick, especially in consumer spending and the housing sector.
Labor Market: The labor market continues its rebalancing act. Factors like stronger participation among workers aged 25 to 54 and increased immigration nearing pre-pandemic levels are influencing this shift. Moreover, a moderation in labor demand and a continuous easing in wage pressures are evident.
The Federal Reserve remains vigilant, ready to adapt its strategies based on evolving economic data. Any signs of the economy not cooling as expected or labor market tightness persisting may lead to further tightening of monetary policy. The central message remains clear: ensuring long-term economic stability is a priority.
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