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- Fed Chair Jerome Powell said on Tuesday that he expects “a significant decline in inflation” this year.
- But he cautioned the road to lower prices will be “bumpy,” signaling further interest rate hikes.
- This comes after the January jobs report far surpassed expectations, adding 517,000 jobs.
This could be the year Americans finally see prices going down — but it’s not going to be painless, the head of the nation’s central bank said.
On Tuesday, Federal Reserve Chair Jerome Powell joined The Economic Club of Washington, DC to discuss topics including the bank’s latest actions raising interest rates, labor market conditions, and Powell’s favorite book genre (it’s spy fiction).
This discussion came after a shocking jobs report last week that found the US economy added 517,000 jobs in January, far surpassing economists’ forecasts. Given that the Fed has been relying on a softening labor market to bring inflation down, the January jobs report raises the question of how the Fed will incorporate that data when deciding how high to raise interest rates next month to keep the US on track to reach its pre-pandemic 2% inflation level goal.
Powell indicated on Tuesday that he’s confident Americans will see prices go down this year, but it’ll likely take increased interest rate hikes to make that happen.
“We expect 2023 to be a year of significant decline in inflation,” Powell said.
“This process is likely to take quite a bit of time,” he added. “It’s not going to be, we don’t think, smooth. It’s probably going to be bumpy.”
He also cautioned that should the next jobs report surpasses expectations like January’s, “it may well be the case that we have to do more rate hikes, more than is priced in.”
The Fed made clear in December that it is not considering cutting interest rates in 2023 — the question now is how long the central bank will keep raising rates, and to what extent, before pausing the process. After Powell announced a 25 basis point interest rate increase on February 1, he said during the press conference that to effectively fight inflation, it’s better to raise interest rates too much than too little.
“I continue to think that it’s very difficult to manage the risk of doing too little and finding out in six or 12 months that we actually were close but didn’t get the job done and inflation springs back and we have to go back in, and now you really do worry about expectations getting unanchored,” Powell said.
As always, recession concerns loom over Powell’s comments about continued interest rate increases. As some Democratic lawmakers have cautioned, continued rate hikes could trigger job losses and a severe economic downturn, but following January’s jobs report, Treasury Secretary Janet Yellen told ABC News on Monday that the probability of a recession right now is low.
“You don’t have a recession when you have 500,000 jobs and the lowest unemployment rate in 50 years,” Yellen said.
“What I see is a path in which inflation is declining significantly, and the economy is remaining strong,” she added. “And really that’s a path I believe is possible, and it’s what I’m hoping we will be able to achieve.”