Fed Chairman Jerome Powell Warns of Sharper Rate Hikes to Tame Inflation: Know What He Said

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There are “unfortunate costs” of reducing inflation, US Federal Reserve Chairman Jerome Powell said on Friday, indicating that the Fed will go for more rate hikes in the coming days to keep the economy from diving into recession. In a high-profile speech at the Fed’s annual economic symposium in Jackson Hole, Powell said that the Fed is resolutely focused on taming the highest inflation in four decades.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth,” he said.

Moreover, there will very likely be some softening of labour market conditions, the Fed chairman said on the day.” While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he added.

“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” he said.

Inflation is running well above 2 per cent, Powell noted, and high inflation has continued to spread through the economy. “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.”

“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 per cent. At our most recent meeting in July, the FOMC raised the target range for the federal funds rate to 2.25 to 2.5 per cent, which is in the Summary of Economic Projection’s (SEP) range of estimates of where the federal funds rate is projected to settle in the longer run,” Powell said.

The Fed’s decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” noted the Fed chairman.

If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will. “Unfortunately, the same is true of expectations of high and volatile inflation,” he said.

“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done,” Powell assured.

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