Fed chief says more ‘pain’ ahead

Jerome Powell defends tough action to bring inflation under control with higher interest rates

US Federal Reserve chairman Jerome Powell leaves a reception dinner at the Jackson Hole economic symposium in Wyoming on Thursday evening. On Friday he gave a highly anticipated speech in which he indicated that the Fed had to continue with tough measures to fight inflation. (Bloomberg Photo)

JACKSON HOLE, Wyoming: Taming high US inflation will inflict “pain” on American families and businesses, but failure to wrestle prices down from their current 40-year high would be even more harmful, Federal Reserve chairman Jerome Powell said on Friday in a highly anticipated speech to global policymakers.

Addressing the annual gathering of central bankers in the mountain resort town of Jackson Hole, Powell did not hold back or leave room for doubt about the central bank’s course, pledging to act “forcefully”.

He warned the world’s largest economy is likely to slow for a sustained period, and the strong US job market will suffer in order to get prices down — which he called the “unfortunate costs of reducing inflation”.

The Fed has been on an aggressive campaign to raise interest rates — and Powell made it clear in Jackson Hole that the fight against inflation is not over.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” he told the gathering of financial industry movers and shakers, held against the backdrop of the majestic Grand Teton mountains.

“While higher interest rates, slower growth and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said in the address, the text of which was posted online by the Fed.

“But a failure to restore price stability would mean far greater pain.”

Modest signs of slowing in the world’s largest economy and easing price pressures had spurred hope in financial markets that the central bank might ease up on its aggressive rate hikes, and perhaps even start to reverse course next year.

But Powell doused those hopes, making it clear that Fed policy and the benchmark borrowing rate would have to remain “sufficiently restrictive” to return inflation to its two percent target.

Improving data

Supply chain issues have continued, worsened by a series of Covid lockdowns in China, and have combined with Russia’s war in Ukraine, to send prices soaring worldwide.

In the battle to contain red-hot US inflation, which topped 9% in June, the Fed has hiked rates four times, including massive, three-quarter-point increases in June and July — steep moves unheard of since the early 1980s — to the current level of a range of 2.25% to 2.5%.

Powell repeated that another three-quarter point increase could be appropriate at the next policy meeting on Sept 20 and 21.

But recent figures have pointed to a slowing in price increases.

The Fed’s preferred inflation measure, the personal consumption expenditure (PCE) price index, fell 0.1% in July a dramatic slowdown from the 1.0% surge in June, largely reflecting the recent sharp retreat in global oil prices.

Over the last 12 months, the PCE price index slowed to 6.3%, the Commerce Department reported.

But Powell did not take much comfort in the figures.

“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” he said.

Powell pointed to the experience of one of his predecessors, the famed inflation dragon slayer Paul Volcker — who used aggressive measures to quell runaway prices — and said officials cannot retreat from their responsibility.

“We must keep at it until the job is done,” he said, warning against any “premature” easing of policy.

Former Bank of England board member Adam Posen, who leads the Peterson Institute for International Economics in Washington, said he expects the benchmark lending rate will reach 4% by February, and but the Fed will be “willing to go further if needed, with the chances of a reversal in 2023 year “very, very low”.

The main stock indices on Wall Street extended losses on Friday after Powell’s comments, which prompted traders to bet on a big move next month.

Money market traders now see a 55% chance of a 75-basis-point rate hike in September versus 45% before the speech.

Critics have slammed the Fed for failing to anticipate the inflationary surge, which the Fed initially viewed as “transitory”.

Powell told the Jackson Hole conference a year ago that price pressure was limited to a relatively narrow group of goods and services. But within months it was spreading and by the time the Fed began raising rates from near zero, inflation was already three times its 2% target.