Fed Chair Powell needs more evidence that inflation is ‘actually declining’

Federal Reserve Chair Jerome Powell said Wednesday he’s looking for “substantially more evidence to give comfort that inflation is actually declining,” than the lower-than-expected October PCE inflation data, at an event hosted by the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy. “Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation.”

He points out that the better-than-expected October inflation print came after upside surprises in the previous two months. He repeated that the Fed needs to raise its key rate to a level that’s sufficiently restrictive to bring inflation down to 2% “over time.”

In the prepared part of his speech, he said “wage growth remains well above levels that would be consistent with 2% inflation over time.”

“It seems to me likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting and Summary of Economic Projections,” he said.

2:22 PM ET: The labor shortage is certain to lead to a lot of investment in technology to replace labor, he said.

2:19 PM ET: The Fed monitors global economic conditions, but the best way to contribute to global economic stability is to get inflation down, he said. “The world will be better off if we get through this quickly.”

2:13 PM ET: “It’s been very disappointing and a little surprising” that the labor force participation rate hasn’t improved more. For now, the Fed has to focus on the demand side of the labor market, rather than the supply, he added.

2:10 PM ET: One risk management technique for policy is to go slower, he said. Another is to hold the policy rate longer at a higher level. “We do not want to overtighten, that’s why we’re slowing down.”

2:06 PM ET: There is a path to a soft or “softish” landing and it’s still “very plausible,” but it has narrowed, Powell said.

1:59 PM ET: Moderating the rate increases at this point is a good way to balance risks, he said.

1:56 PM ET: With the unprecedented series of shocks in the wake of the pandemic that led to the elevated inflation, has Powell thinking: “Are we going into a period where we’re going to have repeat shocks? We don’t know… We still have to use our tools to keep inflation expectations anchored.”

1:51 PM ET: The October JOLTs data was more or less in line with his expectations, he said. “And that’s a good thing, right?”

1:48 PM ET: “Wage increases are probably going to be a very important part of story going forward,” as other inflationary pressures ease, Powell said during the Q&A part of the discussion. “Of course, we want wages to go up, but they have to be consistent with the goal of 2% inflation,” he said.

1:46 PM ET: “The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said. Recall that the the Fed has raised the key rate by 75 basis points at each of its last four meetings.

Update at 1:41 PM ET: Another condition that Powell is looking for — “the restoration of balance between supply and demand in the labor market.” (Markets will get a better view of that on Friday, when the the November jobs report is released.)

1:44 PM ET: Some factors in the lower-than-pandemic labor participation force include health issues from COVID, increasing rates of older workers retiring, the halt of immigration, COVID deaths, and the slower growth in the working-age population.

Developing.. check back for updates.

Earlier, Fed Governor Lisa Cook said the central bank should shift to smaller rate hikes as monetary policy takes time to work its way through the economy.