JACKSON, Wyoming – Federal Reserve Chairman Jerome H. Powell warns that the central bank’s campaign to stem the fastest inflation in decades will cost workers and overall growth. However, he stressed that the Fed must continue to raise interest rates, and for some time to prevent rapid inflation from becoming a more permanent feature of the American economy. emphasized.
“It will take some time to restore price stability, and we need to use tools vigorously to improve the balance between supply and demand,” Mr. Powell said in his Friday speech. “Higher interest rates, slower growth and a softer labor market will bring inflation down, but will also bring some pain to households and businesses,” he said.
“These are the unfortunate costs of keeping inflation under control,” he added.
Speaking at the Kansas City Federal Reserve Bank’s annual meeting near Jackson, Wyoming, Powell used the year’s most-watched speech to highlight the Fed’s dedication to bringing inflation back under control. emphasized the policy. The moves so far have not been enough to achieve that goal. Simply put, much more needs to be done to curb the sharp rise in prices.
Shares plunged after Powell’s remarks. The S&P 500 was down up to 2% by late morning, with all sectors of the index down. Fixed-income investors were also quick to respond to additional rate hikes by the Fed, with his 2-year Treasury yield, sensitive to changes in Fed policy, rising to near his 3.44% high this year.
The Fed chairman’s comments sent a signal that the central bank remains firm in its fight against inflation and does not intend to deviate from its plans to slow the economy any time soon. While the central bank has insisted this past year that it wants to moderately push the economy down, Mr. Powell’s remarks suggest that a bumpy landing is worth paying to restore price stability to the United States. made it clear.
“The process won’t be painless. I think he’s been more outspoken about it,” said Neil Dutta, head of the US economy at Renaissance Macro Research. “The reason a recession is more likely is because that’s the solution to the inflation problem. That’s what they’re telling you.”
Fed raised interest rates from near zero in March to the range Investors have been waiting for hints about how quickly the Fed will raise rates in the coming months. Rising interest rates make it more expensive to borrow money to build a house or expand a business, slowing economic activity and cooling the job market. Ultimately, it could help supply catch up and reduce demand enough to slow the rise in prices.
Mr. Powell did not comment on the pace going forward, saying that Fed officials will not make a third consecutive “unusual” 3/4 percentage point rate hike at their Sept. 20-21 meeting. He suggested that he would pay attention to future data. The Fed reiterated that it was likely to slow rate hikes “at some point,” but also said the central bank had more to do to contain the economy and bring inflation back under control. .
Current interest rate levels are “not the place to stop or pause,” the Fed chairman said, adding that interest rates should probably remain high enough to add meaningful weight to the economy “for some time.” , “The historical record strongly cautions against prematurely easing policy.”
The results were clear. The Fed is far from declaring victory. Powell hailed the slowdown in inflation in July as good news, but said it was not enough to judge the Fed’s mission as being fulfilled.
“The decline in the inflation index in July is a welcome one. The one-month improvement is far from what the Committee needs to see before it is convinced that inflation is declining,” he said. referred to the Federal Open Market Committee to decide
The Fed’s favorite measure of inflation, the Personal Consumption Expenditure Index, rose 6.3% in the year to July, slowing from the previous month but still well below the Fed’s target of 2% on average. far superior. Rising prices have shown hopeful signs of decline for some types of commodities, but much of the recent slowdown has been caused by volatile lower fuel prices.
This is one reason why central banks want to see more evidence that inflation is declining before they are convinced it is headed in the right direction. This is especially true as job growth and wage growth remain strong, suggesting that the economy still has substantial underlying momentum.
The Fed chair also used his speech — arguably the most important speech at the most important economic meeting of the year — to explain a series of reasons why the central bank must remain committed to lowering inflation. Did. short term. This seemed like a message aimed at both the Fed’s critics and the general public.
Understanding Inflation and How It Affects You
Inflation is a global phenomenon, driven in part by shortages of goods thanks to pandemic-era factory closures and disrupted supply chains in Asia. Politicians, including Senator Elizabeth Warren of the Massachusetts Democratic Party, claimed The Fed’s tools are a painful way to lower rising costs. But Mr. Powell made clear in his remarks that more needs to be done to curb demand. That’s what the Fed’s tools can do.
“Central banks can and should take responsibility for keeping inflation low and stable,” Powell said. “Our commitment to achieving price stability is unconditional.”
The Fed chairman said it was important to work to eradicate inflation before the public began to expect it.
“Inflation is now on almost everyone’s mind and highlights a particular risk today: the longer the current high inflation lasts, the more likely it is that inflation expectations will take hold,” Powell said. rice field.
The cost of entrenched inflation can be high. Once rapid price increases become a more permanent feature of the economy, it will likely be much harder to crush, requiring more economic pain in the form of job losses and reduced household demand.
“History shows that the labor costs to keep inflation down are likely to increase, albeit belatedly,” Powell said. “Our aim is to avoid the consequences by acting decisively now.”
The overall signal from Mr. Powell’s remarks is that he and his colleagues are committed to working to bring inflation down, even if that effort is painful. The last line of his speech raised interest rates sharply to keep inflation in check in the 1980s, leading to a campaign against rapid inflation in his autobiography, “Keeping at It,” Published in 2018.
“We will continue until we are confident the job is done,” Mr. Powell said.