The United States will not return to 2% inflation until at least 2025, Fed Chairman Jay Powell has said.
This suggests that the central bank’s fight against inflation is far from over – highlighting the possibility of further interest rate hikes.
Higher rates will not be good news for stocks, which have rallied amid bets that the Fed is about to end its tightening campaign.
US inflation is unlikely to fall below the Federal Reserve’s 2% target until at least 2025, according to Jerome Powell.
The Fed Chairman’s remarks suggest that the central bank’s fight against inflation is far from over, raising the possibility that policymakers will continue to raise interest rates until price pressures are easing further.
The US monetary authority left rates unchanged this month for the first time since last spring, but signaled it could raise them twice more before the end of the year.
“I don’t see us going back to 2% this year or next year,” Powell said at the ECB’s 2023 forum. “I see us getting there the year after.”
Inflation in the United States has steadily declined in recent months, thanks to policy efforts by the Fed to contain price pressures. The annual pace of consumer price increases fell to 4% in May, from a 40-year high of 9.1% reached in mid-2022, but it still remains double the central bank’s target .
The Fed has raised benchmark borrowing costs by 500 basis points since the start of 2022 to contain inflation, in what has been the most aggressive period of monetary tightening since the 1980s. Powell’s latest comments indicate that the central bank’s battle against inflation is far from over.
US equities have had an impressive rally so far this year, in part on expectations that the Fed is about to end its interest rate hikes. They had a dismal 2022 when rates were raised at an accelerated pace.
Higher borrowing costs tend to discourage spending and investment, eat away at corporate profits and potentially trigger a downturn in the economy. Many experts are predicting a recession throughout 2023 – although this has yet to materialize.
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