Powell Speech Adds To Uncertainty About Interest Rates

Investors were seeking clarity about the outlook for interest rates from a Jackson Hole economic symposium but found little from Federal Reserve Chair Jerome Powell, who compared monetary policy to “navigating by the stars under cloudy skies.”

While Powell reiterated the Fed’s target of 2 percent inflation, he called it “challenging” to know when monetary policy is restrictive enough to “know in real time when such a stance has been achieved.”

“There are some challenges that are common to all tightening cycles,” Powell claimed. “For example, real interest rates are now positive and well above mainstream estimates of the neutral policy rate.”

“We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation,” he continued. “But we cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.”

Powell argued the assessment of future monetary policy decisions was further complicated by the lags with which this tightening affects the economy and inflation.

“Beyond these traditional sources of policy uncertainty, the supply and demand dislocations unique to this cycle raise further complications through their effects on inflation and labor market dynamics,” he added.

The Fed chief said the uncertainties, both old and new, complicate the task of balancing the risk of tightening monetary policy too much against the risk of tightening too little.

“Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment,” Powell said. “Doing too much could also do unnecessary harm to the economy.”

Powell promised to proceed carefully with future monetary policy decisions, calling restoring price stability essential to achieving the Fed’s dual mandates of 2 percent inflation over time and maximum employment.

The Fed’s monetary policy committee is next scheduled to meet September 19-20, with the central bank widely expected to leave interest rates unchanged.

However, Powell’s comments may add to recent uncertainty about future rate hikes and how long the Fed plans to keep rates at elevated levels.

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