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Top Central Bankers Expect More Rate Increases Amid Stubborn Inflation


Central bankers from the world’s leading economies said on Wednesday that while they had raised interest rates significantly, additional increases would very likely be needed to wrestle inflation back under control given the strength of labor markets.

“Although policy is restrictive, it may not be restrictive enough, and it has not been restrictive for long enough,” Jerome H. Powell, the chair of the Federal Reserve, said.

Speaking at the 10th annual conference of the European Central Bank in Sintra, Portugal, Mr. Powell said that the strong labor market “was pulling the economy” and was a key reason Fed officials projected two additional rate increases this year.

As U.S. workers get promotions and earn higher wages, it’s helping to shore up demand, which is allowing the economy to grow and giving companies the continued ability to raise prices.

This month, the Fed broke a 10-meeting streak of raising rates by holding them steady at a range of 5 percent to 5.25 percent. But Mr. Powell said on Wednesday that the decision was not a signal about the frequency of future moves. The June skip may not mean that the new norm is to raise rates every other meeting.

“The only thing we decided was not to raise rates at the June meeting,” Mr. Powell said. “I wouldn’t take moving at consecutive meetings off the table at all.”

Speaking on the same panel, Christine Lagarde, the president of the European Central Bank, and Andrew Bailey, the governor of the Bank of England, said that tight labor markets in their economies were also pushing up wages and adding to inflationary pressures.

“We still have ground to cover,” Ms. Lagarde said, reiterating that the E.C.B., which raised rates by a quarter point in June, would likely raise interest rates again in July.

Central bankers from around the world, from Canada to South Africa, gathered in Sintra to discuss monetary policy at a moment of global inflation. Although inflation has moderated somewhat in major economies like the United States and Europe, policymakers spent much the meeting discussing the risk they face in declaring victory too early, given there is a large amount of uncertainty about some of the drivers of inflation, from opacity in the energy market to questions about how companies will respond to rising labor costs.

After a year or more of aggressively raising interest rates in the United States, Britain and European nations that use the euro, the actions of the central bankers have diverged quite sharply in the past month. The Fed held interest rates steady, the European Central Bank raised interest rates a quarter-point and signaled more to come, and the Bank of England unexpectedly lifted rates by half a percentage point.

The Bank of Japan has been an outlier and maintained a very loose monetary policy stance, even as inflation in that country has risen to the highest level in four decades.

Kazuo Ueda, the governor of the Bank of Japan, began his term as governor in April. Speaking on the panel, Mr. Ueda said that while the headline rate of inflation was above 3 percent, Japanese officials think that underlying measures of inflation were still a bit lower than the 2 percent target. “That’s why we are keeping policy unchanged,” he said.

In Europe and the United States, headline inflation rates have been falling this year, but this has brought only limited comfort to policymakers. They all share the same challenge: how to get inflation to the 2 percent target, amid signs that domestic inflation pressures from wage growth in the services sector remain strong.

In the United States, in the labor-intensive services sector, such as hotels, restaurants, financial services, Mr. Powell said “that’s where we are not seeing a lot of progress yet” on inflation. Officials “need to see more softening in labor market conditions,” he added. He doesn’t expect core inflation to go down to 2 percent until 2025.

Mr. Powell emphasized that many officials expected “two or more” additional rate increases in 2023 as of their June meeting.

In the eurozone, Ms. Lagarde said on Wednesday, “we are not seeing enough tangible evidence that underlying inflation, particularly in domestic prices, are stabilizing and coming down.” And so, policymakers want to be sure they keep interest rates restrictive for long enough to be sure inflation goes down.

In Britain, “it’s core — that’s the issue,” Mr. Bailey said. It has been “much stickier,” he added, because the labor market has been tight, in part because the work force is still smaller than it was before the pandemic.

Mr. Bailey said investors expected the bank to raise rates a few more times, but without dismissing or accepting those predictions, he simply said, “We will see.”

Measures of core inflation, which exclude food and energy, and measures of services inflation, which are heavily influenced by companies’ wage costs, are still uncomfortably high. In Britain, core inflation rose last month to 7.1 percent, while it was 5.3 percent in both the United States and eurozone.

“For all the differences between them,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, “they share this common view that they are preparing for the next stage of the inflation process,” where headline inflation is coming down but core isn’t as much.

Policymakers are also watching closely how quickly the effects of higher interest rates are passing through into their economies, a way of determining how effective monetary policy has been. In Britain, a shift from variable to fixed-term mortgages has slowed down the transmission of monetary policy, Mr. Bailey said. “History won’t be a great guide,” he added. A similar, but less uniform, shift has also happened in the eurozone, Ms. Lagarde said.

Recently, the Bank for International Settlements, warned that even as inflation rates fall, “the last mile could prove harder to travel.”

Inflation could prove to be more stubborn than expected as employees ask for higher wages to make up for lost purchasing power over the past year or two. But companies could choose to pass those extra labor costs on to customers. “In this scenario, inflation could remain uncomfortably high,” the bank’s report said. It was a concern repeated by Ms. Lagarde on Tuesday.

Mr. Powell and Ms. Lagarde both said it was possible they would be able to root out inflation without causing recessions, even as analysts increasingly expect their efforts to lead to a downturn.

“Our baseline does not include a recession,” Ms. Lagarde said. “But it’s part of the risk out there.”

Jeanna Smialek contributed reporting.


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