ECB Forum: Interest-rate hiking cycle isn't done yet, central bankers say

Jerome Powell, Chairman of the Federal Reserve System (Fed) and Christine Lagarde, European Central Bank (ECB) President, spoke at the 2023 ECB Forum on Central Banking. Alongside Powell and Lagarde, Bank of England Governor (BoE) Andrew Bailey and Bank of Japan (BoJ) Governor Kazuo Ueda also took part at the same panel and responded to questions on a variety of topics including policy outlook, inflation, labor market and financial conditions.

The Fed left its policy rate unchanged at the range of 5%-5.25% following the June policy meeting but left the door wide open for a return to a 25 basis points (bps) rate hike in July. The ECB raised key rates by 25 bps in June and Lagarde noted that it is very likely the case that the ECB will continue to hike rates in July. In an unexpected decision, the BoE lifted its policy rate by 50 bps to 5% in response to strong wage inflation and Consumer Price Index (CPI) figures recorded in May. Finally, the BoJ maintained its loose policy settings in June but experts think the BoJ could review its Yield Curve Control strategy as early as next month for a possible tweak later this year.

Powell: No reason to change speed of balance sheet adjustment right now

Ueda: "Some smaller, regional Japanese banks are sitting on non-negligible amounts of valuation losses."

Lagarde: "We are looking to complete our operational framework review in the next 6-9 months.

Powell: "I don't see anything that would make us want to adjust speed of balance sheet adjustment right now."

Powell: "I don't see us getting back to 2% inflation this year or the next; I see us making progress."

Powell: Watching commercial real estate very carefully

These are the main takeaways from ECB forum Q&A sessions in Sintra:

Bailey: "It would not be the right thing to do to change the inflation target."

Bailey: "Market doesn't think we are not nearly done at the moment."

Powell: "US economy is quite resilient and latest data are consistent with that."

Powell: "Inflation proved to be more persistent than expected."

Powell: "Watching commercial real estate very carefully."

Powell: "Commercial real estate worries played no part in June decision."

Powell: "We don't target particular parts of the market."

Lagarde: "Transmission of policy is likely to be less rapid than in the past due to fixed rate mortgages."

Lagarde: "We may have underestimated the resilience of our economies."

Ueda: "We're seeing signs of inflation expectations rising but they not fully in line with the inflation target."

Powell: Economic downturn not the most likely case

Ueda: "Still some distance to go in sustainably achieving 2% inflation accompanied by sufficient wage growth."

Ueda: "Economy is going to expand slightly above potential for some time."

Bailey: "Brexit is not part of a strong labor market story."

Lagarde: "We are not seeing enough tangible evidence of falling underlying inflation."

Lagarde: "Second quarter was not great for manufacturing."

"Lagarde: "Manufacturing does not give great hope for a strong recovery."

Powell: "There is significant disinflation in pipeline from rents but it will take time."

Powell: "We need to see more softening in labour market."

Powell: "We're getting the softening we need but slower than expected."

Powell: "Significant probability is we get a downturn but it's not the most likely case."

Powell: We believe there's more restriction coming, driven by labor market

Lagarde: "We still have ground to cover."

Lagarde: "If the baseline stands, we know we will likely hike again in July."

Bailey: "UK economy turned out to be much more resilient."

Bailey: "Data showed clear signs of persistence of inflation."

Bailey: "We will do that is necessary to get inflation to target."

Powell: "Policy hasn't been restrictive for very long."

Powell: "We believe there's more restriction coming, driven by labor market."

Powell: "Strong majority for two more rate hikes in dot plot."

Powell:  "As you get closer to target, you're closer to a place where risks become more in balance."

Powell: "Wouldn't take moving at consecutive meetings off the table."

About Jerome Powell (via Federalreserve.gov)

"Jerome H. Powell first took office as Chair of the Board of Governors of the Federal Reserve System on February 5, 2018, for a four-year term. He was reappointed to the office and sworn in for a second four-year term on May 23, 2022. Mr. Powell also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Mr. Powell has served as a member of the Board of Governors since taking office on May 25, 2012, to fill an unexpired term. He was reappointed to the Board and sworn in on June 16, 2014, for a term ending January 31, 2028."