Jerome Powell: Weakness in the labor market is likely to be an increasingly important factor in inflation

Federal Reserve Chairman Jerome Powell said on Friday that stress in the banking sector may mean that interest rates do not need to be as high to control inflation.

Speaks in a monetary conference in Washington, DCthe central banker noted that Fed initiatives used to deal with problems at medium-sized banks have mostly stopped worst-case scenarios from occurring.

But he noted that trouble at Silicon Valley Bank and others were still able to reconnect through the economy.

“The financial stability tools helped calm conditions in the banking sector. Developments there, on the other hand, are contributing to tighter credit conditions and are likely to weigh on economic growth, employment and inflation,” he said as part of a panel on monetary policy.

“So as a result, our policy rate may not need to rise as much as it otherwise would have to achieve our targets,” he added. “Of course, the extent of that is highly uncertain.”

Powell spoke with markets mostly expecting the Fed at its June meeting to take a break from the series of rate hikes it began in March 2022. However, pricing has been volatile as Fed officials weigh the impact policy has had and will to have on inflation which last summer was at a 41-year high.

Overall, Powell said inflation remains too high.

“A lot of people right now are experiencing high inflation, for the first time in their lives. It’s not a headline to say they really don’t like it,” he said during a forum that also featured former Fed Chairman Ben Bernanke.

“We believe that failure to bring down inflation would not only prolong the pain but also ultimately increase the social costs of returning to price stability, causing even greater harm to families and businesses, and we aim to avoid that by to remain steadfast in the pursuit of our goals,” he added.

Powell characterized current Fed policy as “restrictive” and said future decisions would be data-driven as opposed to being a preset course. The Federal Open Market Committee has raised its benchmark lending rate to a target of 5%-5.25% from near zero where it had sat since the early days of the covid pandemic.

Officials have emphasized that rate hikes work with a lag of a year or more, so the policy measures have not fully circulated through the economy.

“We haven’t made any decisions about the extent to which additional policy funding will be appropriate. But given how far we’ve come, as I noted, we can afford to look at the data and the evolving outlook,” Powell said.

Monetary policy has largely been aimed at cooling a hot labor market there the current unemployment rate of 3.4% is tied at the lowest level since 1953. The Fed’s preferred measure of inflation is at 4.6%, well above the long-term target of 2%.

Economists, including those at the Fed itself, have long predicted that the rate hikes would drag the economy into at least a shallow recession, likely later this year. GDP grew at a slower-than-expected 1.1% annual rate in the first quarter but is on track to accelerate by 2.9% in the second quarter, according to an Atlanta Fed tracker.

Powell spoke on the same day that the New York Fed released research showing that the long-term neutral rate — one that is neither restrictive nor stimulative — is essentially unchanged at very low levels, despite the uptick in inflation from the pandemic.

“Importantly, there is no evidence that the era of very low natural interest rates has ended,” New York Fed President John Williams said in prepared remarks.