Federal Reserve Chairman Jerome Powell said Friday the U.S. labor market might continue to improve so it reaches “maximum employment” next year.
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 inflation readings seen so far this year mean these two inflation hurdles for any rate hike have already been met.
In a discussion sponsored by the central bank of South Africa on Friday, Powell said elevated U.S. inflation readings are likely to last longer than previously expected, and likely well into next year.
Supply constraints 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 expectations moving persistently higher, the Fed would use its tools to bring inflation down, Powell said. When the public expects higher inflation, economists believe this adds to the risk that prices will keep moving higher.
“We need to make sure that our policy is positioned to adjust to a range of possible outcomes,” Powell said.
In September, Fed officials were split evenly between those who thought 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.
Powell said it would be premature to raise interest rates now.
The Fed is still buying $120 billion per month in asset purchases each month. Fed policymakers will meet on Nov. 2-3 to discuss slowing down the purchases. Some Fed officials want the taper to start in mid-November. Others wanted to delay until December.
Powell said Friday it was “time to taper.”
turned lower as Powell was speaking. The yield curve flattened.