Jerome H. Powell, the chair of the Federal Reserve, reiterated the central bank’s commitment to moving forward “carefully” with further rate moves in a speech on Thursday. But he also said that the central bank might need to raise interest rates more if economic data continued to come in hot.
Mr. Powell tried to paint a balanced picture of the challenge facing the Fed in remarks before the Economic Club of New York. He emphasized that the Fed is trying to weigh two goals against one another: It wants to wrestle inflation fully under control, but it also wants to avoid doing too much and unnecessarily hurting the economy.
Yet this is a complicated moment for the central bank as the economy behaves in surprising ways. Officials have rapidly raised interest rates to a range of 5.25 to 5.5 percent over the past 19 months. Policymakers are now debating whether they need to raise rates one more time in 2023.
The higher borrowing costs are supposed to weigh down economic activity — slowing home buying, business expansions and demand of all sorts — in order to cool inflation. But so far, growth has been unexpectedly resilient. Consumers are spending. Companies are hiring. And while wage gains are moderating, overall growth has been robust enough to make some economists question whether the economy is slowing sufficiently to drive inflation back to the Fed’s 2 percent goal.
“We are attentive to recent data showing the resilience of economic growth and demand for labor,” Mr. Powell acknowledged on Thursday. “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.”
Mr. Powell called recent growth data a “surprise,” and said that it had come as consumer demand held up much more strongly than had been expected.
“It may just be that rates haven’t been high enough for long enough,” he said, later adding that “the evidence is not that policy is too tight right now.”
Economists interpreted his remarks to mean that while the Fed is unlikely to raise interest rates at its upcoming meeting, which concludes on Nov. 1, it was leaving the door open to a potential rate increase after that. The Fed’s final meeting of the year concludes on Dec. 13.
“It didn’t sound like he was anxious to raise rates again in November,” said Michael Feroli, chief U.S. economist at J.P. Morgan, explaining that he thinks the Fed will depend on data as it decides what to do in December.
“He definitely didn’t close the door to further rate hikes,” Mr. Feroli said. “But he didn’t signal anything was imminent, either.”
Kathy Bostjancic, chief economist for Nationwide Mutual, said the comments were “balanced, because there is so much uncertainty.”
The Fed chair had reasons to keep his options open. While growth has been strong in recent data, the economy could be poised for a more marked slowdown.
The Fed has already raised short-term interest rates a lot, and those moves “may” still be trickling out to slow down the economy, Mr. Powell noted. And importantly, long-term interest rates in markets have jumped higher over the past two months, making it much more expensive to borrow to buy a house or a car.
Those tougher financial conditions could affect growth, Mr. Powell said.
“Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening,” he said.
Mr. Powell pointed to several possible reasons behind the recent increase in long-term rates: Higher growth, high deficits, the Fed’s decision to shrink its own security holdings and technical market factors could all be contributing factors.
“There are many candidate ideas, and many people feeling their priors have been confirmed,” Mr. Powell said.
He later added that the “bottom line” was the rise in market rates was “something that we’ll be looking at,” and “at the margin, it could” reduce the impetus for the Fed to raise interest rates further.
The war between Israel and Gaza — and the accompanying geopolitical tensions — also adds to uncertainty about the global outlook. It remains too early to know how it will affect the economy, though it could undermine confidence among businesses and consumers.
“Geopolitical tensions are highly elevated and pose important risks to global economic activity,” Mr. Powell said.
Stocks were choppy as Mr. Powell was speaking, suggesting that investors were struggling to understand what his remarks meant for the immediate outlook on interest rates. Higher interest rates tend to be bad news for stock values.
The S&P 500 ended almost 1 percent lower for the day. The move came alongside a further rise in crucial market interest rates, with the 10-year Treasury yield rising within a whisker of 5 percent, a threshold it hasn’t broken through since 2007.
The Fed chair reiterated the Fed’s commitment to bringing inflation under control even at a complicated moment. Consumer price increases have come down substantially since the summer of 2022, when they peaked around 9 percent. But they remained at 3.7 percent as of last month, still well above the roughly 2 percent that prevailed before the onset of the coronavirus pandemic.
“A range of uncertainties, both old ones and new ones, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little,” Mr. Powell said. “Given the uncertainties and risks, and given how far we have come, the committee is proceeding carefully.”
Joe Rennison contributed reporting.