Fed Reserve chair Jerome Powell signals wait and watch on inflation; criticises US govt debt

The US Fed chair’s remarks at a conference, delayed by climate protesters, included rare criticism of US govt debt and admission the bank may have contributed to inflation.

US Fed chair Jerome Powell has signalled another rate pause. Picture: Spencer Platt

Climate protesters disrupted Federal Reserve chairman Jerome Powell’s keenly-awaited speech on monetary policy in New York on Thursday (Friday AEDT), prompting security to dim the lights and remove Mr Powell from the room temporarily.

In dramatic scenes at the Economic Club of New York, half a dozen protesters took to the stage and unfurled a large banner that read “Fed is burning” while making loud chants about the climate in front of a crowd of financial and business elites.

In a speech that suggested the Fed did not understand why the US economy had proved so resilient to higher interest rates — repeatedly defying predictions of recession — Mr Powell took the rare step of criticising the US government’s rapid increase in borrowing.

US debt has soared past $US33 trillion amid a fiscal deficit of almost $US2 trillion.

Climate activists have delayed the start of Fed Chair Jerome Powell's speech.

Protesting high interest rates? No.

Protesting the sun? Yes. pic.twitter.com/69w1esxY6W

— Daniel Turner (@DanielTurnerPTF) October 19, 2023

“We think that the US has an unsustainable path, everyone knows that,” Mr Powell said in a subsequent question and answer session, suggesting Washington’s ballooning debt could help explain the sharp rise in the US 10 year bond yield, which has increased to almost 5 per cent in recent days, the highest level since 2007.

“There‘s a lot of talk about the very large resource demands that … countries are facing and the need for substantial amounts of revenue for the military and dealing with climate change – it’s no secret that we are on an unsustainable fiscal path” he added.

In a rare admission Mr Powell also suggested the Fed, and other central banks, might have overreacted to the Covid-19 pandemic, during which it alone created around US$4 trillion of new money (almost doubling the Fed’s balance sheet) to support the US government’s borrowing requirements.

“If you had perfect hindsight, you might not have had as much inflation if we done less,” he said.

Mr Powell’s remarks, the last in public before the Federal Reserve’s interest-rate setting committee’s meets later this month, appeared to confirm expectations that the central bank was unlikely to lift its benchmark interest rate again soon, preferring a ‘wait and see’ approach.

Over the last 20 months, the Fed has raised interest rates at the fastest pace in four decades to combat inflation that soared to 40-year highs. Its most recent increase, in July, pushed the benchmark federal-funds rate up to 5.5 per cent, a 22-year high, up from close to zero in March 2020.

“The stance of policy is restrictive, meaning that tight policy is putting downward pressure on economic activity and inflation. Given the fast pace of the tightening, there may still be meaningful tightening in the pipeline,” Mr Powell said in his prepared remarks.

Climate activists protest at US Fed chairman Jerome Powell’s speech in New York. Picture: Spencer Platt/AFP

The Fed and many economists have expressed surprise at the resilience of the US economy in the face of rapid increases in interest rates: the unemployment rate has hovered around 3.8 per cent for over a year, consumer spending has remained high, and stock and dwelling prices have not declined significantly, if at all.

“Does it seem like policy is too tight right now? I would have to say no, I think the evidence is not that the policy is too tight right now,” he said, in his unprepared remarks, prompting market yields to rise.

A little later, however, he said the rapid increase in long term bond yields “at the margin” meant the Fed itself would need to increase its benchmark rate less.

Market pricing puts a 98 per cent chance on the Fed not changing interest rates at its next meeting, which concludes on 1st November, and a 34 per cent chance of an interest-rate increase at the Fed’s December meeting — both little changed from before the speech.

The 10-year Treasury yield has now risen nearly 1 percentage point since the Fed last raised rates at the end of July, an unusually large increase in such a short time frame. The yield climbed to new 16-year highs this week and was hovering around 4.95 per cent before Powell’s speech Thursday.

“Given the uncertainties and risks, and how far we have come, the committee is proceeding carefully,” Powell said in prepared remarks for the lunchtime address in New York. “Incoming data over recent months show ongoing progress toward both” of the Fed’s goals to maintain stable inflation and strong employment.

The Fed estimates that overall prices in September rose 3.5 per cent from a year earlier — unchanged from August and down from a peak of 7.1 per cent in June 2022 — using its preferred inflation gauge, the chairman said.

Mr Powell has become a target of climate activists in the past, for declining to embrace as enthusiastically as some other centrals banks, including the Bank of England and the Reserve Bank, the alleged need for monetary policy to help achieve climate change goals.

“Without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals,” he said in a speech in January. “We are not, and will not be, a ‘climate policymaker’”.

Originally published as Fed Reserve chair Jerome Powell signals wait and watch on inflation; criticises US govt debt