Powell says inflation is still too high and lower economic growth is likely needed to bring it down

(Reuters) - The U.S. economy's strength and continued tight labor markets could require still tougher borrowing conditions to control inflation, Fed Chair Jerome Powell said on Thursday, though rising market interest rates could make action by the central bank itself less necessary.

Appearing to align himself with Fed colleagues who have recently said the bond market is now doing some of the central bank's work for it, Powell in remarks to the Economic Club of New York agreed "in principle" that the rise in yields was helping to further tighten financial conditions and "at the margin" might lessen the need for additional Fed rate increases.

It was not an explicit endorsement of that view, but financial markets seemed to read it as one. As Powell spoke investors leaned further into bets that the Fed is done raising its short-term benchmark interest rate. Futures that settle to the Fed's policy rate are now pricing less than a one-in-three chance of another rate hike this year, down from about 40% before he spoke.

The interest rate on 10- and 30-year Treasury bonds rose as Powell made his remarks.

In raising the Fed's benchmark interest rate "the whole idea...is to affect financial conditions," Powell said. Bond markets "are producing tighter financial conditions right now," and seemed to be moving for a variety of reasons, such as an upgraded view of the U.S. economy's strength, independent of any expectations about the Fed.

It is an important distinction, Powell noted. If bond investors were raising long-term bond yields only because they thought the Fed was about to raise its own short-term policy rate, the central bank would have to follow through - or long-term rates would fall.

This appears to be a different dynamic, and one that Powell and several of his colleagues have suggested in recent days could begin substituting a market-driven tightening of credit for changes in the Fed's short-term federal funds rate.

“Financial conditions are tightening, there’s no getting around that, it moves the needle towards the Fed doing less rather than more...I think we’re at the plateau here,” said Shaun Osborne, chief foreign exchange strategist with Scotiabank.

Powell walked a narrow line in his remarks, leaving open the possible need for more rate hikes because the economy had proved stronger than expected, but also noting emerging risks and a need to move with care.

His comments throw the focus on upcoming data for signs the economy is slowing, the labor market cooling and price pressures continuing to ebb, as U.S. central bankers anticipate, or if, as some analysts suggest, the economy is likely to maintain its strength and inflation show signs of rebounding.

"We are attentive to recent data showing the resilience of economic growth and demand for labor," Powell said in prepared remarks that were delayed briefly by climate protesters. "Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy."


Since the Fed began raising interest rates in March of 2022 the unemployment rate has varied little from the current 3.8%, below the level most Fed officials feel is noninflationary, and overall economic growth has generally remained above the 1.8% annual growth rate Fed officials see as the economy's underlying potential.

The Fed, Powell said, is "proceeding carefully" in evaluating the need for any further rate increases, a remark that left intact expectations that the Fed will leave its benchmark policy rate steady at the current 5.25% to 5.5% range in the upcoming Oct. 31-Nov. 1 meeting.

There is evidence the labor market is cooling, Powell said, with some important measures approaching levels seen even before the pandemic, and inflation has also dropped steadily from the highs of last year.

Powell also noted a number of fresh "uncertainties and risks" that need to be accounted for as the Fed tries to balance the threat of allowing inflation to rekindle against the threat of leaning on the economy more than is necessary.

Those include new geopolitical risks to the economy from the "horrifying" attack on Israel by the Palestinian militant Hamas group, Powell said.

"Our institutional role at the Federal Reserve is to monitor these developments for their economic implications, which remain highly uncertain," Powell said. "Speaking for myself, I found the attack on Israel horrifying, as is the prospect for more loss of innocent lives."

But data since the Fed's last meeting has shown U.S. job growth reaccelerating unexpectedly, retail sales defying predictions of a slowdown, and varying measures of prices offering inconsistent signals about whether inflation is on track to return to the Fed's 2% target in a timely manner.

The immediate issue for the Fed is figuring out whether the market-driven rise in long-term bond yields, which have jumped roughly a full percentage point since the Fed's last quarter-point rate hike in July, will lead to the sort of economic cooling seen as needed to finish the inflation fight.

To substitute for Fed action the changes will have to prove persistent at a time when officials still are not fully convinced price pressures are in for a steady decline.

"Inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal," Powell said, citing the progress made since inflation peaked last year but also noting that one of the Fed's main measures of inflation remained at 3.7% through September, nearly twice the central bank's target.

"We cannot yet know how long these lower readings will persist, or where inflation will settle over coming quarters," Powell said. "The path is likely to be bumpy and take some time...My colleagues and I are united in our commitment to bringing inflation down sustainably to 2%."

 Oscar winner George Clooney and other top Hollywood stars have offered $150 million to the SAG-AFTRA actors union as part of a proposal to end the actors' strike as it nears its 100th day.

Their offer, confirmed by Clooney's spokesperson on Thursday, would provide the union an extra $150 million over three years and could help fund improved health benefits.

Clooney also said top stars would only collect residuals once lower-paid actors received theirs.

"A lot of the top earners want to be part of the solution," Clooney told Hollywood publication Deadline, which first reported the news. "We think it's fair for us to pay more into the union."

A SAG-AFTRA spokesperson did not immediately respond to a request for comment.

Members of SAG-AFTRA have been on strike since July. Talks between the union and the Alliance of Motion Picture and Television Producers (AMPTP) broke down last week, dashing hopes for a quick resolution.

The strike, which will mark its 100th day on Saturday, has disrupted film and television production, leaving thousands of crew members without work as well as the actors.

Hollywood's film and television writers ratified a new, three-year contract earlier this month, ending their 148-day work stoppage.

United Auto Workers union members who went on strike at Mercedes-supplier ZF's plant in Alabama last month demanding higher pay and better healthcare benefits ended a nearly month-long walkout on Thursday.

The union said the strike by 190 workers was over after a tentative agreement had been ratified. Workers last month had rejected an earlier contract offer.

ZF, which makes front axles used by Mercedes-Benz (MBGn.DE) at its nearby Alabama plant, said last month the Tuscaloosa factory would operate while talks with the union continued.

A ZF spokesperson said the company was "glad to be able to move forward and continue to provide world-class technology to our customers from ZF Tuscaloosa."

About 34,000 UAW members remain on strike at the Detroit Three automakers - Ford Motor (F.N), General Motors (GM.N), and Chrysler parent Stellantis (STLAM.MI). UAW President Shawn Fain met at the bargaining table on Thursday with both GM and Stellantis, officials said.

Stellantis said on Friday it was temporarily laying off another 100 workers in Ohio at a machining plant and bringing the total to 1,520 employees on furlough.

The UAW last expanded its strike on Oct. 11 when it walked out at Ford's Kentucky Truck Plant, the company's largest plant worldwide. The strike at targeted facilities began on Sept. 15.

Ford said late on Wednesday that it was temporarily laying off another 150 workers because of the strike, bringing the total to 2,730 workers furloughed since the start of the strike. GM has more than 2,300 workers furloughed.

Fain said last week that UAW members would now walk out of additional facilities without warning rather than waiting until Fridays to announce new plans, as the union had done initially.

Reporting by David Shepardson; Editing by Jonathan Oatis and Jamie Freed

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