Jay Powell says Fed will ‘keep at it’ in hawkish inflation speech

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Jay Powell stated that the Federal Reserve “must hold out until the job is done,” as he used a Jackson Hole speech to deliver its most aggressive message yet about the Federal Reserve’s determination to tame rising inflation. by raising interest rates.

In a much-anticipated speech at the first in-person meeting of global central bankers since the start of the coronavirus pandemic, the Fed chairman said cutting inflation would likely result in “a sustained period of below-trend growth” and he predicted that there is “very likely to be an easing of labor market conditions”.

“These are the unfortunate costs of curbing inflation,” Powell said, predicting “some pain” for households and businesses, adding: “But if price stability is not restored, that would mean a lot more pain.”

The comments were intended to allay doubts about the Fed’s decision to continue to pressure the U.S. economy to stamp out inflation after it began its most aggressive monetary policy tightening since 1981.

The US stock market fell sharply after Powell spoke, with the benchmark S&P 500 index falling 2.2 percent and the tech-heavy Nasdaq Composite falling 2.7 percent.

Yields on short-term US government debt rose. The yield on the policy-sensitive two-year government bond rose by 0.04 percentage point to 3.41 percent. The yield on the 10-year bond – which moves in line with growth and inflation expectations – had changed little at 3.02 percent. Yields rise when the price of a bond falls.

“We are taking strong and rapid steps to moderate demand to better match supply and to keep inflation expectations anchored,” Powell said.

Powell’s speech contrasted sharply with the message he delivered at last year’s symposium, when he predicted that rising consumer prices were a “transient” phenomenon due to supply chain problems. It has now become clear that inflation is demand-driven and is therefore likely to persist for longer.

The Fed chairman harked back to the lessons of the 1970s, when the US central bank presided over a period of turmoil after making several policy blunders and failing to contain inflation. That forced Paul Volcker, who became Fed chairman in August 1979, to choke the economy and cause more pain than it would have needed if officials had acted more quickly.

“The historic record strongly warns against easing policy prematurely,” Powell said, explaining that interest rates should remain at levels that inhibit growth “for a while.”

The key lesson from that period was that “central banks can and should take responsibility for delivering low and stable inflation,” he said, reiterating the Fed’s “unconditional” commitment to address price growth.

He also pointed to the risk of inflation remaining too high for too long, triggering a chain reaction with people expecting further price increases.

“The longer the current period of high inflation lasts, the more likely expectations of higher inflation become entrenched,” Powell warned.

Financial markets have rebounded in recent weeks amid expectations that the Fed could slacken its demand dampening efforts as economic data deteriorated further and concerns grew about the risks of being too heavy-handed.

Last month, the central bank implemented its second consecutive 0.75 percentage point rate hike, pushing the Federal Funds rate to a new target range of 2.25 percent to 2.50 percent.

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 instead.

Powell’s comments led traders to shift their bets on how high policymakers will eventually raise interest rates. Futures markets on Friday suggested the Fed would raise Federal Funds interest rates to 3.82 percent in March next year.

Futures markets also suggested that traders are accepting that the central bank could keep those rates high for longer. It marked a noticeable divergence as investors hesitated to bet that the Fed would keep rates high in the face of a slowing economy.

“The Fed is willing to take more short-term pain to ensure longer-term price stability,” said Ashish Shah, Chief Investment Officer of Public Investing at Goldman Sachs Asset Management. “You’re unlikely to see a dovish pivot in weaker growth. They’d rather make sure inflation and inflation expectations are anchored enough.”

Powell said it would be appropriate at some point to slow the pace of rate hikes. But he dismissed recent data showing a slight decline in inflation as insufficient, adding: “The one-month improvement is far less than what the committee needs to see before we can be sure that inflation is on the decline. “

Most officials insist they can get inflation under control without triggering a painful recession. That goes against the consensus of Wall Street economists, who are predicting at least a mild recession during the course of next year.

Economists also expect the unemployment rate in the US to rise above the 4.1 percent widely expected by FOMC members and regional bank governors in June. The unemployment rate, a bright spot as the economic picture darkens, is hovering at a multi-decade low of 3.5 percent.

Are we heading for a global recession? Our economics editor Chris Giles and US economics editor Colby Smith discussed this and how different countries are likely to respond in our latest IG Live. look at it here.


The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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