Focus of the Fed on the Labor Market

In his presentation on Wednesday (November 30) at the Brookings Institution in Washington, DC, Federal Reserve (Fed) president Jerome Powell signaled a lesser increase in the US basic interest rate at the December 14 FOMC meeting.

After four consecutive meetings with rises of 75 basis points, expectations increasingly concentrate on a raise of only 50 basis points this time. From nearly zero in March, the basic rate would end the year between 4.25 and 4.5% per annum.

Powell emphasized, however, that inflation in the United States remains elevated. In the 12 months leading up to October, he estimated that inflation in personal consumer spending was 6% per year. In order to reduce annual inflation to 2%, interest rates must rise to restrictive levels.

He stated that the Fed has extra ground to cover, suggesting that there will be an additional increase in interest rates in 2023.

He stated that the objective of monetary tightening is to limit demand growth relative to aggregate supply, which will necessitate an extended period of below-trend US economic growth. In spite of this year's monetary tightening and slower growth, he could not observe any meaningful success in containing inflation.

The focus of Powell's address was divided between inflation and the labor market. When he addressed the three key components of the inflation rate — goods, housing, and services other than housing — it was clear why he had taken this action (Figure 1).

While the core inflation of goods has fallen from its high levels throughout the year, housing services have continued to increase at a rate of 7.1% over the past year. Powell remarked, however, that the rate of price growth for new leases has slowed significantly since the middle of the year.

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