Federal Reserve Chairman Jerome Powell in an appearance on Thursday emphasized the importance of reducing inflation now before the public gets too used to higher prices and expects them as a standard.
In his latest comments underscoring his commitment to the fight against inflation, Powell said expectations played an important role and were a determining factor in why inflation was so persistent in the 1970s. and 80.
“History strongly warns against easing policy too soon,” the central banker said in a question and answer session led by the Cato Institute, a Washington-based liberal think tank. DC, presented. “I can assure you that my colleagues and I are strongly committed to this project and we will keep it until the work is completed.”
The event is Powell’s scheduled final public appearance before the next Fed meeting on September 20-21.
Markets are mostly positive, with key averages little change in the beginning on Wall Street. Treasury yields were mostly higher, with two-year notes, most sensitive to Fed rate hikes, rising nearly 5 basis points to 3.49%. The base point is 0.01 percentage points.
The Fed has raised its benchmark interest rate four times this year, with the lending rate now set in the range of 2.25%-2.50%.
Markets widely expected the rate-setting Federal Open Market Committee to enact a 0.75 percentage point increase for the third time in a row when it meets later this month. In fact, that probability rose to 86% in Powell’s comment, according to CME Group’s FedWatch tracker on futures bets on the funds offered. Both Goldman Sachs and Bank of America told clients to expect a three-quarter point gain.
One reason to act aggressively is to ensure that inflation, which is at its highest level in more than 40 years, is not ingrained in the public consciousness, Powell said.
“The Fed has a responsibility to stabilize prices, by which we mean 2% inflation over time,” he said. “The longer inflation stays above target, the greater the risk that the public will begin to view higher inflation as the norm, and that is likely to increase the costs of reducing inflation.”
There have been some signs recently that at least the monthly inflation path is easing. In particular, the price of gasoline continuously decreased after a short period of increase over $5 a gallon in early summer.
The Fed looks at inflation data for the last time before its meeting next week, when the Bureau of Labor Statistics releases consumer price index data for August. According to FactSet, economists are expecting the CPI to rise to zero. .2% after it was flat in July. However, year by year increase in July is 8.5%and many areas outside of energy have increased significantly.
Powell said inflationary pressures have largely come from pandemic-specific causes. When inflation first began to pick up in the spring of 2021, Powell and his colleagues dismissed it as “transient” and did not react to any major policy moves before starting to raise interest rates. capacity in March 2022.
However, he said now the Fed must continue to act until inflation declines and avoid the consequences of the 1970s when the failure to implement a positive policy response has dented public expectations. on rising inflation.
“We need to act now, as straight and forceful as we have been, and we need to hold on until the work is done to avoid that,” he said.
Powell noted a strong labor market, with strong hiring levels persisting even as interest rates rise and as Fed officials expect the official unemployment rate to climb higher. He warned last month that the economy could experience “some pain” from tighter policy but said slowing growth was needed to tame inflation.
“What we hope to achieve is a period of below-trend growth that will bring the labor market back to a better equilibrium and that will bring wages down to a level more in line with inflation,” he said. 2% over time”.