EconoFACTS

August 26, 2022 | 10:33

Powell's Not Backing Down

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sounding a bit like Winston Churchill, Chair Powell says the war on inflation isn't over and that "we must keep at it until the job is done". While the economy is slowing, it still shows "strong underlying momentum" and labour markets remain very strong. Although milder July price figures are welcome, inflation is still running too hot for the Fed's liking and not yet under control. So, it will need to act "purposefully" to move the stance of policy to "sufficiently restrictive" levels.

There was no hint that the Chair fears the risk of over tightening policy, as was suggested in the minutes of the last meeting. Nor is he even thinking about thinking about reversing course on rates. Reducing inflation will “require maintaining a restrictive policy stance for some time".

He left few clues about the September 21 decision, which will be based on the "totality" of data since the July meeting and "the evolving outlook". He did note that "At some point, as the stance of monetary policy tightens further, it will likely become appropriate to slow the pace of increases.” This might be a nod toward a third straight 75-bp hike later this month; but again, it will largely come down to the data.

Bottom line: Dashing market hopes of rate cuts next year, Powell affirmed that it's onward and upwards for the fed funds rate for now. We continue to look for a 50-bp hike on the 21st and rates ultimately peaking in the 3.50%-to-3.75% range, which should be "sufficiently restrictive" to cool demand and gradually lower inflation without tipping the economy into a deep downturn.