The Federal Reserve (Fed) chief on Thursday reiterated that the U.S. central bank would likely raise interest rates at least once more this year because of persistently high inflation in the economy’s service sector and the surprisingly tight job market.
Speaking to a Senate committee, Fed Chair Jerome Powell noted that “inflation has moderated somewhat since the middle of last year.” Still, the Fed chair stressed, “Inflation pressures continue to run high.”
Powell was testifying to the Senate Banking Committee on the second day of semi-annual testimony to Congress. On Wednesday, he addressed the House Financial Services Committee and sounded a similar message that some further rate hikes are likely coming this year.
In May, consumer prices were up 4% compared with 12 months earlier, down from a year-over-year peak of 9.1% in June 2022, but still double the Fed’s 2% inflation target.
The Fed has raised its benchmark rate aggressively since March 2022 in a push to slow the economy and reduce inflationary pressure. At their meeting last week, the Fed’s policymakers kept their key rate unchanged after 10 straight hikes, buying time to see what impact higher rates are having on the economy. But the increases may resume after a pause: 12 of 18 Fed policymakers last week indicated that they envision at least two more rate hikes this year.
Rising rates have slammed the U.S. housing market, with its dependence on mortgage rates, which have risen substantially since the Fed unleashed its anti-inflation campaign.
But higher rates take longer to affect business and prices in services industries, such as hotels, bars and restaurants, where labor costs weigh heavily. And the job market has remained remarkably resilient in the face of increased borrowing costs. Employers are adding a healthy average of 314,000 jobs a month this year. And at 3.7%, the U.S. unemployment rate is still near a half-century low.
“Labor demand still substantially exceeds the supply of available workers,” Powell said.
The Fed has expressed concern that an overly tight labor market puts upward pressure on wages – and inflation.
In his remarks to the Banking Committee, Powell noted signs that the labor market is cooling though it remains hot by historical standards.
Monthly job openings are down from a record 12 million in March 2022 to 10.1 million in April this year. The Fed’s policymakers hope to see the job market slow painlessly, with employers advertising fewer openings rather than cutting many jobs.
Workers, as a whole, may finally be getting some relief from higher prices. Hourly wages rose faster than inflation last month for the first time since March 2021, according to the Labor Department.
