Federal Reserve Chairman Jerome Powell said Friday he sees the possibility that the U.S. service sector will continue to recover in coming months, accompanied by such strong job growth that the labor market returns to full health next year.
“I think it’s very possible we’ll be at-or-near labor market conditions that are consistent with our maximum employment goal next year,” Powell said during a virtual conference sponsored by the central bank of South Africa.
If so, that would remove what likely is the last major hurdle for any interest-rate hikes.
In late 2019, the Fed laid out three requirements before lifting interest rates away from near-zero. In addition to the unemployment requirement, inflation needed to reach 2% and then remain above that level for some time to make up for past undershooting and then interest rates could be raised.
Some Fed officials, including Cleveland Fed President Loretta Mester, have suggested the high U.S. inflation readings seen so far this year mean these two inflation hurdles for any rate hike have already been met.
Essentially, Powell is saying “we might have to raise rates next year,” said Tim Duy, chief U.S. economist at SGH Macro Advisors.
In the discussion, Powell said he thinks inflation will “eventually” move lower but elevated U.S. inflation readings are likely to last longer than previously expected and likely well into next year.
Supply constraints and shortages facing businesses are pushing inflation higher and it is difficult to predict when these bottlenecks will ease, Powell said.
If the Fed sees a serious risk of inflation moving “persistently” higher, the Fed would act to tighten monetary policy, Powell said.
“No one should doubt that we will use our tools to guide inflation back down to 2%,” Powell said.
In September, Fed officials were split evenly between those who thought interest rates might have to increase at least once in 2022 and officials who thought it wouldn’t be needed until 2023.
In the short-run, Powell said U.S. economic growth slowed sharply in the July-September quarter as the coronavirus delta variant caused consumers to pull back from eating out and shopping. The government will release its first estimate of third-quarter GDP growth next week.
But the slowdown in the third quarter is likely temporary and job growth should pick back up to the strong gains seen in the summer, he said.
One prominent economist is warning that the slowdown in the economy might turn out to be the start of a recession.
Powell said it would be premature to raise interest rates now. There is no sign of any so-called “wage-price spiral” that can cause inflation to take off, he said.
Since the recession during the pandemic last year the Fed has been buying $120 billion per month in bonds each month. Fed policymakers will meet on Nov. 2-3 to discuss slowing down the purchases. Some Fed officials want the tapering of purchases to start in mid-November. Others wanted to delay until December.
“I do think it is time to taper,” Powell said. The buying would end in the middle of next year, he said.
closed mixed on Friday after Powell spoke while the Treasury yield curve flattened.