Powell: Inflation Fight May Last 'Quite a Bit of Time'

Facts

• Responding to Friday's Labor Dept. report showing an increase in job hiring, US Federal Reserve (Fed) Chairman Jerome Powell said the process of bringing inflation down to the 2% target "is likely to take quite a bit of time," and that, "It’s probably going to be bumpy."
• Powell's statement came before the Economic Club of Washington, where he declined to say whether the Fed would implement rate hikes higher than the 5-5.25% range forecast in December. However, in the wake of the surprising recent jobs report, he said it was prepared to if continued wage growth led to price jumps.
• Following Powell earlier expressing optimism over slowing inflation while avoiding recession layoffs, he added that the parallel downward trends of both — which runs contrary to most economic models — demonstrate the post-COVID economy.
• Referring to the more than 500K jobs added in January, Minneapolis Fed Pres. Neel Kashkari, who a month ago said the rate should rise to 5.4%, said he doesn't think the current rates have made "much of an imprint." Since Friday, he and several other Fed members have signaled support for raising the rate above the 5-5.25% range.
• Bond investors and economists believe that a slowdown in investment, spending, and hiring could lead to a pause on rate hikes in March and May, but that economic reacceleration could result in waiting until the summer for any pauses. No Fed officials have projected any rate cuts this year.
• While a "significant" drop in inflation is expected this year, Powell said the Fed expects it not to hit the 2% mark until 2024. He predicts housing inflation to come down in the middle of this year and noted progress in the prices of goods, though also acknowledged the service sector remains high.

Sources: Wall Street Journal, Reuters, The Hill, New York Post, and CNN.

Narratives

• Narrative A, as provided by Reuters. As the January jobs report seemed to surprise Fed officials and investors alike, the Fed's next move should probably be aimed at hiking rates a little bit more. As of December, inflation was still twice the target rate, and unless some drastic increase occurs before the next meeting, raising the benchmark to 5.25% or more will likely be what's needed.
• Narrative B, as provided by Business Insider. Despite the current official outlook, the US could see Fed rate cuts this year rather than hikes or pauses. Though it didn't show in the January report, all it will take is one month of negative job growth on top of the weakening economy. This is a real possibility given the already —declining economy as well as the recent massive layoffs, particularly in the tech sector.