Federal Reserve Chairman Jerome Powell has maintained that interest rates are steady for now, but left the door open for a rate hike later this year if the economy does not slow enough for inflation to continue to fall.
Powell's anticipated appearance at the Fed's annual symposium in Jaskson Hole highlighted how it is trying to find the right path in reining in the economy to reduce price pressures without plunging it into an unnecessarily sharp slowdown. Powell twice said the Fed would "proceed cautiously" in any next move.
Economy to grow less than 2% next year
Powell noted recent signs that the economy may not be slowing as officials expect. They expected inflation to fall further as they expect the economy to grow below its long-term trend of around 2% next year.
Powell said further evidence that the economy could instead grow above this trend rate "could threaten further progress on inflation and could warrant further tightening of monetary policy".
Fed officials last month raised their benchmark federal funds rate by a quarter percentage point to a range between 5.25% and 5.5%, a 22-year high and continuing the fastest run of increases in four decades. Their next meeting is September 19-20.
Some officials are concerned about further rate hikes
In June, most officials thought they would raise rates to a range of 5.5% to 5.75%, implying another quarter-point increase later this year.
Some officials are concerned about further rate increases because they expect past increases will continue to weaken the economy by making it more expensive and harder for companies and individuals to borrow. Others worry that strong economic growth could cause inflation to fall more slowly than expected if the Fed does not respond by raising rates again.
Financial conditions tightened
Financial conditions, including lending standards and borrowing rates, have generally tightened in a way that typically slows economic activity. Labour market imbalances have eased.
Stronger economic activity has pushed yields on long-dated government bonds to their highest levels in 15 years in recent weeks. This is driving up the cost of mortgages, car loans and credit cards.
The average 30-year fixed-rate mortgage reached 7.31% last week, the highest level since December 2000, according to the Mortgage Bankers Association. Applications to buy homes fell last week to the lowest level since April 1995.
US consumers remained resilient
US consumers have remained resilient and falling inflation is now leading to inflation-adjusted wage growth for the first time in more than two years. Americans increased their retail spending in July at the fastest pace since the start of the year, the government reported last week.
Inflation-adjusted interest rates rose to highs
Powell acknowledged uncertainty about how high rates need to rise to provide sufficient economic restraint. Inflation-adjusted interest rates have risen to historically high levels, putting them "well above conventional estimates" of the so-called neutral rate , which neither stimulates nor slows economic activity, Powell added.
"However, we cannot identify a neutral interest rate with certainty, and therefore there is always uncertainty about the exact level of monetary policy accommodation."