Jerome Powell warns that the war on inflation could be painful

Jackson, Yu. Jerome H. Powell, Federal Reserve Chairman, has warned that the central bank’s drive to beat the fastest inflation in decades will be at the expense of workers and overall growth. But he stressed that the Fed must continue to raise interest rates – and keep them high for a while – to prevent rapid rate increases from becoming a more permanent feature of the US economy.

“Restoring price stability will take time and require aggressive use of our tools to achieve a better balance between supply and demand,” Powell said in a speech on Friday. “While high interest rates, slow growth, and weak labor market conditions will bring inflation down, they will also bring some pain to households and businesses.”

Then he added, “These are the unfortunate costs of lowering inflation.”

Mr. Powell, speaking at the Federal Reserve’s annual conference in Kansas City near Jackson, UT, used his most closely watched speeches this year to underscore the Fed’s dedication to bringing inflation back under control and to underscore that its policy moves so far have not been sufficient to achieve this goal. Simply put, more must be done to tame rapid price increases.

Stock prices fell sharply Following Mr. Powell’s comments. The S&P 500 was down as much as 2 percent late in the morning, with every sector of the index lower. Bond investors also quickly adjusted for an increase in Fed rates, with the two-year Treasury yield, which is influenced by changes in Fed policy, near its highest level in the year at 3.44 percent.

The Fed chair’s comments sent a signal that the central bank remains resolute in fighting inflation and does not plan to deviate from its plan to slow the economy any time soon. Central bankers have spent most of the past year saying they hope the economy will deteriorate gently, but Powell’s comments made clear that a bumpy landing would be a price worth paying to restore price stability to the US.

“It’s not going to be an easy process, and I think he’s being more vocal about that,” said Neil Dutta, head of US economics at Renaissance Macro Research. “The probability of a recession is rising, because that’s the answer to the inflation problem – that’s what they tell you.”

The Fed raised interest rates from nearly zero in March to the range From 2.25 to 2.5 percent, investors were waiting for any hint about how quickly and how quickly the Federal Reserve would raise interest rates in the coming months. Higher interest rates increase the cost of borrowing money to build a home or expand a business, which slows economic activity and cools the job market. This can eventually help reduce demand enough that supply catches up and price increases slow.

Powell did not say what pace lies ahead, indicating that Fed officials will be watching the incoming data as they decide whether to raise three-quarters of an “extraordinary” significant rate hike at their September 20-21 meeting. He reiterated that the Fed is likely to slow its increases “at some point”, but also said that central bankers have more work to do when it comes to constraining the economy and bringing inflation back under control.

The Fed chief said that the current level of interest rates is “not a place for pause or pause,” adding that rates will likely need to remain high enough to materially impact the economy “for some time,” and that “the historical record is a strong caution against policy easing before It’s time.”

The result was clear: the Fed is nowhere near declaring victory. While Mr. Powell saluted a Inflation slows down in July And as good news, he said, it’s not enough to determine that the Fed’s mission is on track to be accomplished.

“Low inflation readings for July are welcome, and the improvement in one month is much less than what the committee will need to see before we can be confident of lower inflation,” he said, referring to the Federal Open Market Committee’s policymaking.

Prefer the Federal Reserve inflation gaugeThe PCE index rose 6.3 percent in the year to July, slowing from the previous month but still well above the 2 percent average released by the Fed. Price increases are showing hopeful signs of easing in some types of commodities, but much of the recent slowdown has been driven by lower volatile fuel prices.

This is one reason why central bankers want to see more evidence that inflation is abating before they feel confident that it is heading in the right direction. This is especially true because job gains and wage increases remain strong, indicating that the economy still has significant underlying momentum.

The Fed chief also used his platform – the most important speech at what is arguably the most important economic conference of the year – to lay out a set of reasons why the central bank should remain dedicated to lowering inflation even if its push causes pain in the short term. It was a message apparently directed at the Fed’s critics and the general public, as Americans everywhere grapple with rapidly rising costs.

Inflation is a global phenomenon caused in part by a shortage of goods, thanks to pandemic-era factory closures in Asia and faltering supply chains. Politicians including Senator Elizabeth Warren, Democrat of Massachusetts, argue The Fed’s tools are a painful way to cut rising costs. But Mr. Powell made clear in his remarks that there is work to be done on demand cooling – which the Fed’s tools can do.

“Central banks can and should take responsibility for achieving low and stable inflation,” Powell said. ‘Our responsibility to provide price stability is unconditional.’

The Fed chair said it’s critical to work to stamp out inflation before the public begins to anticipate it, because such expectations can change behavior in ways that lock in rapid price increases.

“Inflation is getting the attention of almost everyone right now, which highlights certain risks today: the longer the current wave of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” Powell said.

The cost of entrenched inflation may be high. Once rapid price increases become a more permanent feature of the economy, it will likely become more difficult to crush them, requiring more economic pain in the form of lost jobs and family suffering to stifle demand.

“History shows that hiring costs to reduce inflation are likely to increase with delay,” Powell said. “Our goal is to avoid this outcome by acting with determination now.”

The overall indication from Powell’s observations is that he and his colleagues are dedicated to reducing inflation, even if the effort is painful. Even the last line of his speech seemed to hint at his longtime predecessor, Paul Volcker, who raised prices sharply in the 1980s to stifle inflation and who explained his campaign against rapid inflation in an autobiography titled “Keeping at It,” Published in 2018.

“We will continue to do so until we are sure that the job is done,” Mr. Powell said.