WASHINGTON—Federal Reserve Chair Jerome Powell indicated the central bank is on track to raise interest rates by a half percentage point at its next meeting, stepping down from an unprecedented series of four 0.75-point rate rises aimed at combating high inflation.
Mr. Powell, in a speech Wednesday, said an overheated labor market needed to cool more for the Fed to be confident that inflation would make durable downward progress toward its 2% goal.
Because the Fed has raised rates rapidly and it takes time for those moves to influence the economy, it would make sense for officials to slow rate increases, he said at an event at the Brookings Institution. “The time for moderating the pace of rate increases may come as soon as the December meeting,” he said.
Mr. Powell reviewed signs of progress on the inflation fight, including a slowdown in interest-rate sensitive sectors of the economy such as housing and improving supply-chain conditions. But he said that declines in goods prices and rents, which have contributed notably to inflation over the last 18 months, might be insufficient if firms don’t slow their hiring.
“The labor market … shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation,” Mr. Powell said. “Despite some promising developments, we have a long way to go in restoring price stability.”
Fed officials lifted their benchmark rate by 0.75 percentage point on Nov. 2 to a range between 3.75% and 4%. Many officials have signaled they are leaning toward approving a 0.5-point increase at their Dec. 13-14 meeting. They had held the rate near zero until March.
A big question now for the Fed is how much farther to keep raising rates. Some officials are concerned about causing unnecessary damage to the economy and labor market because it takes time for the full effects of those increases to ripple through the economy.
Mr. Powell repeated his earlier view that officials were likely to raise rates to a somewhat higher level early next year than they had anticipated in projections released after their September meeting, when most officials saw their benchmark rate rising to between 4.5% and 5%.
Steps to boost workforce participation aren’t controlled by the Fed and wouldn’t be able to take effect rapidly enough to address the current bout of inflation, Mr. Powell said.
The upshot is that Fed policy will seek to slow inflation and wage growth by reducing demand for workers, a subject that Mr. Powell addressed delicately on Wednesday. “For the near term, a moderation of labor demand growth will be required to restore balance to the labor market,” he said.
While strong wage growth “is a good thing,” he implied it is too high right now to support a return to the 2% inflation rate the Fed targets. “For wage growth to be sustainable, it needs to be consistent with 2% inflation,” he said.
Separately, Treasury Secretary Janet Yellen said on Wednesday that inflation could come down without broad layoffs occurring across the economy if companies slow hiring by reducing the number of unfilled jobs they’re trying to fill.
The U.S. unemployment rate stood at 3.7% in October. A rate between 4% and 5% would still indicate a robust labor market, she said at a New York Times event. “I think we can make a lot of progress in the labor market just on the hiring...and job opening side. I don’t think it’s necessary to see very substantial layoffs,” she added.