Powell Dovish at Speech Today

Jerome Powell spoke at the Thomas Laubach Research Conference in Washington, D.C. on May 19, 2023.

• Federal Reserve Chair Jerome Powell said that the stress in the banking system could mean the central bank won’t have to raise interest rates as high as otherwise to slow the economy.
• Powell spoke about the so-called separation principle, in which central bankers use emergency lending tools to address financial- and credit-market disruptions so that their monetary policy tools–primarily, interest rates–can stay focused on combating high inflation.
• The Fed has raised its benchmark federal-funds rate aggressively over the past year to fight inflation, most recently to a range between 5% and 5.25% this month.
• Officials have indicated that their decision on whether to raise rates again at their June 13-14 policy meeting could be a close call. Some officials, including Powell, have hinted that they might pause rate increases to assess the effects of the banking sector strains. Others have said inflation and economic activity aren’t slowing enough to justify holding rates steady.
• Powell said the Fed was committed to bringing inflation down to its 2% goal.
• New York Fed President John Williams presented research at the conference showing the Covid-19 pandemic didn’t change estimates of a “neutral” interest rate that neither stimulates nor restricts demand, a finding with important implications for how high officials may raise rates to slow the economy.
• If estimates of the neutral rate of interest shifted higher, officials could conclude that the rates needed to slow inflation would be considerably higher. If those estimates haven’t changed, then the fed-funds rate might be expected to return to less than 3% if the Fed succeeds in bringing inflation down to its 2% target over the next few years.

In short, Powell is saying that the Fed may not need to raise interest rates as high as previously thought in order to slow the economy and bring inflation under control. This is because the stress in the banking system could help to slow the economy on its own. However, it is still too early to say for sure what the Fed will do.