Jay Powell declared the Federal Reserve “must stay in until the job is done” as he used a speech in Jackson Hole to deliver his most hawkish message yet about the central bank’s resolve – American to tame rising inflation by raising interest rates.
In a much-anticipated speech at the first face-to-face meeting of global central bankers since the pandemic, Powell said the reduction in inflation would likely lead to “a sustained period of below-trend growth” and predicted that “much there will probably be some softening of the workforce.” market conditions”.
“These are the unfortunate costs of reducing inflation,” Powell said as he predicted “some pain” for households and businesses, adding: “But a failure to restore price stability would mean pain much bigger.”
The remarks were intended to dispel doubts about the Fed’s decision to continue pressing the U.S. economy to eliminate inflation after beginning the most aggressive tightening of monetary policy since 1981.
“We are taking strong and swift action to moderate demand to better align with supply and to keep inflation expectations anchored,” Powell said.
Powell’s speech was a stark contrast to the message he delivered at last year’s symposium, when he predicted rising consumer prices were a “transitory” phenomenon stemming from supply chain issues. Since then, it has become clear that inflation is demand-driven and is therefore likely to persist longer.
The Fed’s presidency harked back to the lessons of the 1970s, when the US central bank presided over a period of turmoil after it made several policy mistakes and failed to curb inflation. This forced Paul Volcker, who became Fed chairman in August 1979, to choke the economy and cause more pain than would have been necessary if officials had acted more quickly.
“The historical record strongly cautions against premature easing of policy,” Powell said as he explained that interest rates will need to remain at a growth-suppressing level “for some time.”
The main lesson from that period was that “central banks can and must take responsibility for delivering low and stable inflation,” he said, reiterating the Fed’s “unconditional” commitment to addressing the price growth.
He also highlighted the risk of inflation remaining too high for too long, causing a chain reaction whereby people come to expect more price increases.
“The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” Powell warned.
Financial markets had rallied in recent weeks amid expectations that the Fed might ease its efforts to dampen demand as incoming economic data deteriorated further and concerns rose about the risk of being too heavy-handed.
Last month, the central bank offered its second consecutive hike of 0.75 percentage points, taking the federal funds rate to a new target range of 2.25% to 2.50%.
Fed officials are debating whether a third increase of the same magnitude will be necessary at the September meeting, or whether they should opt for a half-point increase.
Powell said at some point it would be appropriate to slow the pace of interest rate hikes. But he dismissed recent data showing a slight reduction in inflation as insufficient, adding: “The one-month improvement is well below what the committee will need to see before it has confidence that inflation is picking up moving downward.”
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Most officials maintain that they can control inflation without triggering a painful recession. That runs counter to the consensus view among Wall Street economists, who predict at least a mild recession sometime next year.
Economists also expect the unemployment rate to rise beyond the 4.1% generally expected by FOMC members and regional bank presidents in June. The unemployment rate, the current bright spot in the US economy, is at a multi-decade low of 3.5 percent.