When the head of the Federal Reserve talks, the financial world hangs on every word.
That was certainly the case on Wednesday when Fed chair Jerome Powell spoke with reporters to explain the decision by central bank officials at their just-concluded meeting to hold interest rates steady, breaking a string of 10 consecutive increases aimed at defanging inflation.
But even as the Fed took a breather, Powell said that rates would likely resume climbing, perhaps as soon next month, because inflation remains too pernicious. Many experts didn’t see that coming.
“The pause was expected but the big surprise was how clearly the Fed telegraphed that more rate hikes were coming,” the Globe’s Jim Puzzanghera, who covers the national economy from Washington, told me. “If the idea was to pause and assess the effects of the rate hikes to this point, you’d think there would be more of a wait-and-see attitude.”
Over the course of his 50-minute news conference, Powell covered a lot of ground. Herewith are some of his key pronouncements and what they could mean for the economy.
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“Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions.”
Translation from the Fedspeak: Economic growth will be lackluster and unemployment will increase as sustained higher borrowing costs weigh on employers and consumers alike.
On Wednesday members of the Fed committee that sets rates released their latest economic projections. Their median estimate for growth in output was 1 percent this year. While that was up from 0.4 percent in their March forecasts, it would be half the rate recorded last year.
The new estimates also showed the jobless rate rising to 4.1 percent this year and 4.5 percent in 2024 and 2025. In May, unemployment stood at 3.7 percent.
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“The process of getting inflation back down to 2 percent has a long way to go.”
The Fed tracks inflation in many ways, but its preferred measure is a version of the personal consumption expenditure price index excluding the volatile energy and food categories. Core PCE, as it’s called, has eased since peaking at a 5.4 percent annual pace in February 2022, the month before policy makers began boosting borrowing costs.
But the most recent reading, at 4.7 percent in April, was still more than double the central bank’s 2 percent target.
“If you look at core PCE inflation overall, look at it over the last six months, you’re just not seeing a lot of progress,” Powell said.
The new Fed projections indicate that core PCE won’t return to target territory for three years.
“Not a single person on the committee wrote down a rate cut this year nor do I think it is at all likely to be appropriate.”
If the Fed’s inflation outlook holds, officials expect to to lift the benchmark federal funds rate by about one-half of a percentage point to 5.6 percent by year-end, probably in two separate increments.
Next year, if inflation pulls back as forecast, Fed officials project the lending rate will drop to 4.6 percent. That means borrowing costs — for unpaid credit card balances, mortgages, and business loans — will remain elevated.In financial markets, futures prices are signaling a more than 40 percent chance that the federal funds rate will end the year at or below the current range of 5 to 5.2 percent.
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Some investors are betting that inflation will retreat faster than the Fed expects. Others see a recession hitting. In either case, the Fed would not have to boost rates again.
“New rents . . . are coming in at low levels and it’s really a matter of time as that goes through the pipeline.”
Since shelter costs make up about 16 percent of PCE including food and energy — the biggest category after medical care — the growth in rents and rent equivalents for homeowners has to slow in order for inflation to come down.
Rent increases began to decelerate in 2022, according to data tracked by private firms, but the trend takes about a year to show up in inflation reports.
“We now see housing putting in a bottom and maybe even moving up a little bit,” Powell said. “I do think we will see rents and house prices filtering into housing services inflation. And I don’t see them coming up quickly.”
“It’s possible.”
No Fed press conference is complete these days without a question about a “soft landing” — winning the war on inflation without the collateral damage of a deep recession.
Asked about it on Wednesday, Powell repeated the answer he’s given all along: “There is a path to getting inflation back down to 2 percent without having to see the kind of sharp downturn and large losses of employment that we’ve seen in so many past instances.”
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But then he quickly pivoted to the Fed’s priority.
“The committee is completely unified in the need to get inflation down to 2 percent and will do whatever it takes to get it down to 2 percent over time.”
No translation needed.
Larry Edelman can be reached at larry.edelman@globe.com. Follow him on Twitter @GlobeNewsEd.