The Federal Reserve's Emphasis on Employment

President of the Federal Reserve (Fed) Jerome Powell indicated a lesser increase in the US basic interest rate as a decision for the upcoming FOMC meeting on December 14 in a speech he delivered last Wednesday (November 30) at the Brookings Institution in Washington, DC.

After four consecutive meetings with rises of 75 basis points, expectations have settled on a more modest increase of 50 basis points this time. The basic rate began the year at around zero and would end up between 4.25 and 4.5% annually.

However, Powell stressed that US inflation remains elevated. He quoted a figure of 6% annual inflation in personal consumer spending for the 12 months prior to October.

Inflation needs to be kept under 2% annually, which means interest rates need to rise to prohibitive levels. When asked if the Fed would raise interest rates again in 2023, he said that there was still more material to cover.

He explained that monetary tightening's goal is to reduce the rate of rising demand in relation to rising aggregate supply, which will necessitate an extended period of below-trend US economic growth. Although monetary policy has tightened and GDP has slowed this year, he has not yet seen any evidence that inflation is being brought under control.

The inflation and employment situations were both discussed in Powell's talk. He explained his reasoning by focusing on the three pillars of inflation: consumer products, housing costs, and non-housing services (Figure 1).

While the year's end saw a drop in the core inflation of goods, housing services continued to increase at a rate of 7.1%. However, Powell pointed out that the rate of increase in new lease prices has slowed significantly since the middle of the year.

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