Fed’s Powell Outlines Hawkish Interest Rate Plans to Congress

In the Federal Reserve’s semiannual report to Congress, Chair Jerome Powell’s advanced published comments reinforced the between-the-lines takes that many had after June’s meeting of the Federal Open Market Committee. That is, don’t expect the most recent rate hike pause to continue.

“My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2 percent goal,” Powell planned to say in the opening of his remarks. “Price stability is the responsibility of the Federal Reserve, and without it, the economy does not work for anyone.”

That’s the soft-handed way of saying that inflation must retreat to the 2% level that the Fed —other central banks as well — says is the desired level. That is the door that can, and likely will, open to additional interest rate hikes as well as continued quantitative tightening to reduce the amount of liquidity in markets.

“Over the 12 months ending in April, total personal consumption expenditures (PCE) prices rose 4.4 percent; excluding the volatile food and energy categories, core PCE prices rose 4.7 percent,” Powell says. “In May, the 12-month change in the consumer price index (CPI) came in at 4.0 percent, and the change in the core CPI was 5.3 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.”

Most recently, the FOMC paused rate hikes. “We have been seeing the effects of our policy tightening on demand in the most interest rate–sensitive sectors of the economy,” says Powell. “It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.”

But the time he mentions isn’t infinite or even moderately long-running. “Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” he says.

None of this is new, although markets frequently seem to block out what the Fed says. Those in commercial real estate better not if they want to plan effectively for the near term. “Unfortunately for many weary CRE stakeholders, the relief of the ‘skip’ was short-lived,” Moody’s Analytics recently wrote. “The Fed’s forecasted terminal rate increased another 50 bps, which signaled that a minimum, the Fed is doubling down on ‘higher for longer.’  Refinancing is already a considerable issue now, higher rates will only exacerbate the issue.”