Powell foresees more ‘restriction’ ahead, with consecutive rate hikes.

Federal Reserve Chair Jerome Powell Warns of More Monetary Policy Restrictions

In a recent panel discussion at a European Central Bank (ECB) forum, Federal Reserve Chair Jerome Powell delivered a cautionary message to the U.S. economy. He stated that more monetary policy restrictions should be expected and that inflation will not return to its 2 percent target for a couple more years.

Powell emphasized that while policy has not been restrictive for a long time, the recent move into restrictive territory is just the beginning. He believes that there is more restriction to come, as labor market conditions remain tight and economic growth has been unexpectedly resilient.

According to Powell, the key inflation gauge for the Federal Reserve is non-housing services inflation, which includes travel, food, financial, healthcare, and hotel services. The annual services inflation rate has slowed for the third consecutive month, standing at 6.3 percent in May. Powell stressed the need for progress in this area, particularly in aligning supply and demand in the labor market and softening labor market conditions to alleviate inflationary pressures.

Despite leaving the benchmark fed funds rate unchanged, Powell did not rule out rate hikes at consecutive meetings. However, he did express that it would be appropriate to slow the pace of rate hikes.

Looking ahead, Powell does not anticipate core inflation, which excludes volatile food and energy components, to reach the Fed’s 2 percent target until 2025. He acknowledged that inflation has proven to be more persistent than expected.

On the topic of the balance sheet, Powell confirmed that quantitative tightening is progressing as planned. The Fed is currently trimming its approximately $8.4 trillion balance sheet at a pace of $1 trillion per year.

Bank Stress

Powell also addressed concerns about the U.S. banking system