Fed Chair Powell Talks Two More Rate Hikes and the Yield Curve Steepens

Federal Reserve Chair Jerome Powell discussed “how global efforts to boost resilience in the financial sector over the past decade have been an important success” in a speech at the Banco de Espana Fourth Conference on Financial Stability, Madrid, Spain.

What he also did was, again, set the stage for a more conservative and hawkish view of the economy combined with the need for additional interest rate increases. Actions that maybe might contain inflation … but could also bring on a recession as the needed tool.

Part of the preparation was noting where things weren’t moving in the directions the Fed thinks necessary for prices to come down. “Growth in consumer spending has picked up this year, and some indicators in the housing market have turned up recently,” he said. The labor market is tight with strong payroll gains. “While the jobs-to-workers gap has declined, labor demand still substantially exceeds the supply of available workers.” No mention of supply chain or increased corporate profits.

“Inflation, however, remains well above our longer-run goal of 2 percent,” he noted. “Over the 12 months ending in May, total personal consumption expenditures (PCE) prices are estimated to have risen 3.9 percent; excluding the volatile food and energy categories, core PCE prices likely rose 4.7 percent. Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go.”

That moved to talk of interest rate increases of 5 percentage points since early last year and tighter consumer and business credit conditions. Still, not enough.

“At our last meeting, the Federal Open Market Committee (FOMC) decided to maintain the target range for the federal funds rate at 5 to 5-1/4 percent while continuing the process of significantly reducing our securities holdings,” he said. “We made this decision in light of the distance we have come in tightening policy, the uncertain lags in monetary policy, and the potential headwinds from credit tightening. As noted in the FOMC’s Summary of Economic Projections, a strong majority of Committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year.”

If it seems that the Fed’s head is looking for a recession, markets may be readying themselves to comply. As Reuters noted, “Several parts of the U.S. Treasury yield curve are reaching deeper levels of inversion, a sign that bond investors are increasingly worried about an economic slowdown as the Federal Reserve looks set to raise interest rates further.”