In a speech today, Fed Chair Jerome Powell underscored the ongoing battle with inflation, asserting, “Inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go.”

He added that “a strong majority of Committee participants expect that it will be appropriate to raise interest rates two or more times by the end of the year,” referring to the latest dot plot.

Powell painted a mixed picture of the U.S. economy. He noted that “recent indicators suggest that economic activity has continued to expand at a modest pace.” He also pointed to the effects of higher interest rates and slower output growth on business fixed investment.

His comments also highlight the persistent tightness in the labor market. “Over the past three months, payroll job gains have been robust,” Powell said, adding that “labor demand still substantially exceeds the supply of available workers.” Nevertheless, he also observed “some easing in nominal wage growth, and declining vacancies.”

Full speech of Fed Powell here.

Minneapolis Federal Reserve Bank President Neel Kashkari warned that tightening credit conditions due to banking stress and monetary policy actions could lead to an economic downturn or even a recession.

He said, “It could be that our monetary policy actions and the tightening of credit conditions because of this banking stress lead to an economic downturn. That might even lead to a recession.”

Kashkari acknowledged that bond markets seem to expect a quick drop in inflation, allowing Fed to cut rates. However, he expressed less optimism, predicting inflation to reach “the mid threes” by the end of the year, which remains above the Fed’s 2% target.

Regarding recent financial stress, Kashkari cautiously noted that there are hopeful signs that risks are better understood and calm is being restored, but he is not yet ready to declare all clear.

Fed Vice Chair Richard Clarida said in a speech, there have been some weaker than expected data in recent months. Services spending remained “well below pre-pandemic levels”. Improvement tin labor markets has “slowed notably”, with “true unemployment rate” closer to 10% level. Core PCE inflation was just running at 1.5%.

There were also some encouraging data as retail sales “stepped up considerably” in January. Housing sector has “more than fully recovered from the down turn”. Business investment and manufacturing production have “rebounded robustly”.

Overall, vaccine developments, and the new fiscal relief measures indicated that “the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished.”

Full speech here.

Atlanta Fed President Raphael Bostic stated in a BloombergTV interview today that it will take time before the Fed is confident that inflation will return to 2%. He reiterated his stance that “nothing has changed” regarding his view that perhaps only one rate cut will be necessary this year.

He noted that inflation data for the first part of the year has been “very bumpy,” reflecting a slow but gradual slowdown in economic activity. Bostic mentioned that business leaders report a gradual slowdown in their operations, with pricing power weakening.

“I do think that our new steady state is likely to be higher than what people have known over the last decade — maybe back to where we were in the 1990s and 2000s, but we’ll just have to see,” Bostic added, suggesting a shift in the long-term inflation outlook compared to recent years.