(Reuters) – The strength of the U.S. economy and persistent labor market tensions could justify further interest rate hikes from the Federal Reserve (Fed), its chairman, Jerome Powell, said on Thursday .

“We are attentive to recent data showing resilience in economic growth and labor demand. Additional evidence of sustainably above-trend growth, or showing that labor market tensions are not easing “more, could jeopardize further progress on inflation and justify further tightening of monetary policy,” he said in a speech to the Economic Club of New York.

For inflation to sustainably return to the Fed’s 2% target, it “will likely require a period of below-trend growth and further easing of labor market conditions,” he added.

On the markets, the yield on ten-year Treasuries increased by 7.9 basis points, to 4.9813%.

Despite aggressive monetary tightening since March 2022, the unemployment rate in the United States has changed little and is currently at 3.8%, a level considered by most Fed officials to be insufficient to sustainably lower inflation.

Overall economic growth remains above the annual rate of 1.8% while a sustained rise in rates should in principle result in a slowdown, or even a recession.

The Fed is “cautiously studying” the need for further increases in the cost of credit for its meeting on October 31 and November 1, noted Jerome Powell. Federal funds rates are currently in a range of 5.25%-5.5%.

It is clear that the job market is cooling, he added, however, with some important measures approaching levels seen even before the COVID-19 pandemic.

Jerome Powell also noted new “uncertainties and new risks” that must be taken into account as the Fed attempts to balance the threat of a resumption of inflation with the threat of support for saving more than necessary.

These include new geopolitical risks for the economy, linked to the “appalling” attack by Palestinian Hamas against Israel, he said.

“Our institutional role at the Federal Reserve is to monitor these events for their economic implications, which remain very uncertain,” he said.

He also noted recent pressures on bond yields, which have helped to “significantly” tighten overall financial conditions.

“Persistent changes in financial conditions can have implications for the trajectory of monetary policy,” he stressed, explaining that rising bond yields in the markets could have the same impact as a monetary tightening of the Fed.

(Reporting Howard Schneider; Claude Chendjou, edited by Blandine Hénault and Kate Entringer)

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