Updated Oct 19, 2023 - Economy

Fed's Powell: Hot growth "could warrant further tightening"

Fed chair Jerome Powell. Photo: Aaron Schwartz/Xinhua via Getty Images

Robust economic growth could undermine the Fed's fight against inflation and warrant more rate increases, chair Jerome Powell said in a speech Thursday, while also acknowledging a surge in long-term interest rates that could slow activity.

Why it matters: The Fed may well be done with interest rate hikes, but is keeping its options on the table if a recent run of strong economic data continues and looks to undermine progress on inflation.

Driving the news: "We are attentive to recent data showing the resilience of economic growth and demand for labor," Powell said at the Economic Club of New York.

  • "Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy."

The context: Recent reports on job growth, inflation, and retail sales all pointed to an acceleration in economic activity in late summer and into fall.

  • Third quarter GDP growth, due out next week, could show an economy that was expanding at a red-hot 5%-plus rate from July through September.

Yes, but: Powell also acknowledged that the runup in long-term interest rates in recent weeks — the 10 year Treasury as of late morning was inching close to 5%, a 16-year high — adds risk in the other direction.

  • "Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening," Powell said, adding that the Fed will "remain attentive to these developments."

Between the lines: Powell repeats language that the Fed is "proceeding carefully" in its policy moves, which is a signal that there will be no additional rate hike in a meeting two weeks from now.

  • However, another interest rate increase in December looks to be very much in play in light of Powell's comments about the risks turbo-charged growth will undermine the Fed's inflation fight.

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