Federal Reserve Chair Jerome Powell said Tuesday the "disinflationary process" in the U.S. economy has begun, and said additional rate hikes will likely be necessary to bring inflation back to its 2% target.
Speaking in an interview with David Rubenstein at the Economic Club of Washington, D.C., Powell reiterated his comments from last week regarding inflation pressures, saying: "The disinflationary process has begun. It has begun in the goods sector, which is about 25% of the economy."
Powell said this process, "is going to take quite a bit of time, and is not going to be smooth."
"We will likely need to do additional rate increases," Powell said, as the Fed works to bring inflation back to its target.
Asked about Friday's stronger-than-expected December jobs report, Powell said the strong labor market, "shows you why we think [disinflation] will be a process that takes a significant period of time."
"The labor market is extraordinarily strong," Powell added, noting it is "good inflation has started to come down with a strong labor market."
Still, Powell's comments did not suggest Friday's strong jobs report would change the central bank's approach to future rate increases. As Powell spoke, stocks rallied to session highs, though markets later gave up those gains in afternoon trading.
Though Powell added the caveat that if we continue to get higher inflation reports or jobs reports the Fed may need to raise rates more than what’s been price in by investors.
Powell says the strength of the job market is structural and due somewhat to the pandemic, which shut off immigration and contributed to a shortage of workers in the U.S. He thinks these pressures are starting to abate now. And while the job market remains strong, Powell noted that increases in wages are coming down.
"The Fed is wedded to a stale outlook," Neil Dutta, head of economics at Renaissance Macro, said in an email on Tuesday. "That is dovish because it gives the current momentum in the economy more room to run. [Powell] had the opportunity to lean against what happened last week and he took a pass."
Powell's comments come less than a week after the Federal Reserve's latest policy meeting, which saw the central bank raise interest rates by another 0.25%. This marked the second-straight meeting the Fed slowed its pace of interest rate increases.
In December, the central bank raised rates by 0.50%; in each of the prior four meetings, the Fed had raised rates by 0.75%. In a press conference following that decision, Powell emphasized signs of "disinflation" are starting to emerge in the economy.
Asked about the time it might take for inflation to return to the Fed's 2% target, Powell suggested this process would likely take into next year. As for the Fed's current 2% target — which some commentators, including Rubenstein, have suggested could need to be changed in favor of a higher target — Powell said this remains a firm target.
Powell also noted that it would probably take a couple years until the Fed's balance sheet, which currently sits around $8.4 trillion, is wound down.
On the debt ceiling, Powell again said there remains "one way" for this issue to be resolved, which is Congress raising the government's borrowing limit.
