Federal Reserve Chairman Jerome Powell sent a strong message Friday: The Fed could raise more major interest rate hikes in the coming months and is focused solely on tackling the highest inflation in four decades.
Powell has warned more clearly than ever that the Fed’s continued tightening of credit will be a pain for many households and businesses as its higher rates further slow the economy and potentially lead to job losses. Is.
“These are the unfortunate costs of reducing inflation,” he said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole. “But a failure to restore price stability will mean far more pain.”
Investors were hoping for a sign that the Fed may soon reduce its rate hike later this year if inflation were to show signs of easing further. But the Fed chair indicated that time may not be near.
After raising its key short-term rate by three-quarters of a point in each of its last two meetings — part of the Fed’s fastest rate series since the early 1980s — Powell said the Fed would consider that momentum “anything.” To the point” could be easier. ”- suggesting that no such slowing is imminent.
Powell said the size of the Fed’s rate hike at its next meeting in late September – whether by half or three-quarters of a cent – will depend on inflation and jobs data. However, any size increase would exceed the Fed’s traditional quarter-point increase, a reflection of how severe inflation has become.
The Fed chairman said that while the low inflation readings reported for July are “welcome” “the one-month correction falls far short of what the committee needs to see before we are confident that inflation is going down.” Is.”
He said the history of high inflation in the 1970s, when the central bank sought to counter high prices with only intermittent rate hikes, shows that the Fed should remain focused.
“Historical records strongly warn against prematurely” lowering interest rates, he said. “We should keep this up until the job is done.”
Powell’s speech is the marquee event of the Fed’s annual economic symposium in Jackson Hole, the first time since 2019 that the central bankers’ conference is being held in person, after going virtual for two years during the COVID-19 pandemic.
Since March, the Fed has implemented its fastest pace of rate hikes in decades to try to curb inflation, which has punished households with rising costs for food, gas, rent and other necessities . The central bank has raised its benchmark rate by 2 full percentage points from 2.25% to 2.5% in just four sittings.
Those increases have led to higher costs for mortgages, car loans and other consumer and business lending. Home sales are falling since the Fed first indicated it would raise borrowing costs.
In June, policymakers at the Fed indicated they expected their key rate to end in the range of 3.25% to 3.5% by 2022 and then rise further to between 3.75% and 4% the following year. If rates reach their projected levels later this year, they will be at their highest point since 2008.
Powell is betting he can create a higher-risk outcome: slowing the economy enough to ease inflationary pressures, yet not so much as to trigger a recession.
His task is complicated by a hazy picture of the economy: On Thursday, the government said the economy shrank at a 0.6% annual rate in the April-June period, the second straight quarter of contraction. Yet employers are still increasingly hiring, and the number of people receiving unemployment assistance, a measure of layoffs, is relatively small.
At the same time, inflation is still very high, although there are signs of some moderation, especially in the form of a fall in gas prices.
At its meeting in July, Fed policymakers expressed two competing concerns that highlighted their delicate work.
According to the minutes of that meeting, officials – who are not identified by name – have prioritized their inflation fight. Still, some officials said there was a risk the Fed would raise borrowing costs more than necessary, threatening a recession. If inflation falls closer to the Fed’s 2% target and the economy weakens further, it may be difficult to reconcile those differing views.
At last year’s Jackson Hole symposium, Powell listed five reasons why he thought inflation would be “transient.” Yet instead it has persisted, and many economists have noted that those observations have not aged well.
Powell implicitly acknowledged that history at the start of his remarks on Friday, when he said, “In past Jackson Hole conferences, I have discussed a wide range of topics such as the ever-changing structure of the economy and the conduct of monetary policy. challenges.”
“Today,” he said, “my remarks will be shorter, my attention narrower and my message more direct.”