Fed's Employment Focus

Jerome Powell, head of the Federal Reserve (Fed), predicted a modest increase in the US basic interest rate for the December 14 FOMC meeting. After four straight 75-basis-point rises, expectations are now for a 50-basis-point increase. From virtually zero in March, the basic rate ended the year between 4.25 and 4.5%.

Powell noted strong US inflation. He said personal consumer expenditure inflation was 6% per year up to October. Interest rates must rise to curb inflation to 2% a year. He said the Fed had more ground to cover, suggesting another interest rate hike in 2023.

Monetary tightening will require a sustained period of below-trend US economic growth, he said. He didn't see clear progress in reducing inflation despite monetary tightening and slower growth this year.

Powell's speech emphasized inflation and the job market. He was motivated by the three basic components of inflation: products, housing, and other services (Figure 1). While core inflation of goods fell, housing services rose 7.1% in the last year. Powell noticed the decline in new lease prices since the middle of the year.

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