Jerome Powell at Jackson Hole, WY
Jonathan Crosby | Reuters
Federal Reserve Chairman Jerome Powell made a stark pledge on Friday to contain inflation, warning that he expects the central bank to continue raising interest rates in a way that will cause “some painful” for the US economy.
In his much-anticipated annual policy speech in Jackson Hole, Wyoming, Powell asserted that the Fed will “use our tools vigorously” to attack inflation that is still near the highest level in more than 40 years.
Even with a series of four consecutive rate hikes totaling 2.25 percentage points, Powell said there is “no place to stop or pause” although the benchmark rate could be around a zone. areas that are not considered to stimulate or limit growth.
“While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring some pain to households and businesses,” he said in the notes. prepared speech. “These are unfortunate costs to reducing inflation. But failing to restore price stability will mean much greater pain.”
Inventory losses linger when Powell starts speech, with the Dow Jones Industrial Average falling nearly 200 points. Treasury yields are generally higher.
The comment comes amid signs that inflation may have peaked but shows no sign of slowing down.
Two closely watched metrics, the consumer price index and the personal spending price index, shows little change in price in Julylargely due to the sharp drop in energy costs.
At the same time, other sectors of the economy are slowing down. Housing in particular is falling in price rapidly, and economists expect that the dramatic increase in hiring over the past year and a half is likely to cool down.
However, Powell warned that the Fed’s focus is broader than a month or two of data and it will continue to push until inflation falls closer to its 2 percent long-term target.
“We are shifting our policy stance on purpose to the point where it is restrained enough to bring inflation back to 2%,” he said. Looking to the future, the central bank leader added that “the restoration of price stability is likely to require maintaining a restrictive policy stance for a while. The historical record strongly warns against easing policy too soon.”
To the point
Incredibly brief speech.
While Fed leaders, including Powell, often use the Jackson Hole symposium as an opportunity to map out broad policy changes, Powell’s remarks Friday were just six pages long. He introduced the speech by noting that “his remarks will be shorter, my focus narrower, and my message more direct.”
“Price stability is the responsibility of the Federal Reserve and serves as the foundation of our economy,” he said. “Without price stability, the economy doesn’t work for anyone.”
The Fed is using a lesson from the past as a guide for current policy.
Specifically, Powell said that the inflation of 40 years ago provides the current Fed with three lessons: Central banks like the Fed are responsible for managing inflation, that expectations are important, and that “we must maintain maintain it until the job is done.”
Powell noted that the Fed’s inability to act aggressively in the 1970s caused a prolongation of high inflation expectations, leading to draconian rate hikes in the early 1980s. In that case, the Fed Chair when it was Paul Volcker who pulled the economy into recession to tame inflation.
While repeatedly stating that he does not think a recession is an inevitable outcome for the US economy, Powell noted that managing expectations is crucial if the Fed is to avoid a Volcker-like outcome. .
In the early 1980s, “a long period of very restrictive monetary policy was eventually needed to prevent high inflation and begin the process of bringing inflation down to a low and stable level, which is the norm for inflation.” until last spring,” Powell said. “Our aim is to avoid that outcome by acting with determination now.”
One concept that sums up Powell’s thinking is the concept of “rational inattention”. It basically means that people pay less attention to inflation when it is low and more when it is high.
“Inflation is, of course, in the spotlight right now, which highlights a particular risk right now: The longer the current high inflation continues, the more likely it is to expect higher inflation will become more difficult,” he said.
