The Federal Reserve plans to raise interest rates more to reduce inflation

The Chairman of the US Federal Reserve has stated that the central bank will keep increasing interest rates “as deemed necessary,” due to persistently elevated inflation levels.

Jerome Powell, speaking at the annual gathering of central bankers in Jackson Hole, Wyoming, noted that while the rate of price increases had declined from its peak, it still exceeded the Federal Reserve’s 2% target. He emphasized the possibility of further interest rate hikes, suggesting they could remain elevated for an extended period.

As of July, U.S. inflation stood at 3.2%, with the key interest rate at 5.25%—the highest in over two decades—following 11 consecutive rate hikes since early 2022. Powell acknowledged the decline in inflation from its peak but stressed that it remained too high. He stated that the Fed was prepared to raise rates further if necessary and intended to maintain a restrictive policy stance until they were confident that inflation was on a sustainable path toward their target.

Powell highlighted external factors contributing to elevated prices, such as the ongoing Russia-Ukraine conflict, as well as the continued volatility in food and energy prices. He hinted at the possibility of more rate increases in the near term as the Fed awaited additional data.

Despite the economy proving more resilient than expected, Powell cautioned that higher rates might be required to cool it down sufficiently to achieve the 2% inflation goal. He mentioned the need for further progress in the housing market, which had started to show signs of resurgence, as a potential reason for tightening monetary policy.

Additionally, Powell pointed out that a softening in the labor market was necessary before interest rates could be reduced. Wage growth continued due to employers offering higher wages to attract workers in a shrinking workforce, which, in theory, could contribute to inflation and necessitate prolonged higher interest rates. Powell’s remarks indicated that the Fed would proceed cautiously, aligning with market expectations.