The Federal Reserve chairman said its aggressive interest rate hikes will continue despite expected pain in households and labor markets.
Federal Reserve Chairman Jerome Powell made his remarks during an economic policy symposium speech Friday in Jackson Hole, Wyoming.
“Reducing inflation is likely to require a sustained period of below-trend growth,” the Fed chairman said. “Moreover, there will very likely be some softening of labor market conditions.”
“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 continued. “These are the unfortunate costs of reducing inflation.”
Powell explained the U.S. economy is clearly slowing from 2021’s high growth rates, reflecting the economy’s reopening from COVID closures. He added the economy continues to show strong underlying momentum. He noted the labor market is particularly strong, which worries the Federal Reserve because of the out-of-balance demand for workers that far exceeds the supply of people looking for work.
Inflation is running well above two percent, he said, and high inflation continues to spread through the economy. Powell welcomed July’s lower inflation numbers but noted a single month’s improvement is not enough to convince Reserve board members inflation is under control.
The Federal Reserve’s Board of Governors is determined to get inflation down to two percent. Powell noted July’s interest rate hike by the Fed was the second 75 basis point increase (0.75 percent) approved in its last two meetings. He reminded listeners of his July remark that another unusually large increase may be appropriate at the next Fed committee meeting.
Powell said the decision at the Fed’s September meeting will depend on the inflation data and its outlook for the economy.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” said Powell. “The historical record cautions strongly against prematurely loosening policy.”
He said the Federal Reserve policies are based on what it learned about high inflation during the 1970s and ’80s compared to the low, steady inflation of the last two decades. Powell pointed to three lessons in particular.
First, said Powell, is that central banks can and should take responsibility for delivering low and stable inflation. He acknowledged high inflation is a global issue. Strong demand and constrained supply are responsible for U.S. inflation, according to the chairman before noting Fed tools only work on demand.
“There is clearly a job to do in moderating demand to better align with supply,” Powell said. “We are committed to doing that job.”
Second is that the public’s expectations about future inflation can play an important role in setting the path of inflation. “If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will,” he said.
And third is the Federal Reserve must keep at it until the job is done.
“History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting,” he concluded.
In other words, interests rates will continue to rise until it hurts enough to drive inflation back down to two percent. Interest rate increases translate into higher mortgage, credit and living costs for consumers. Businesses also feel the pinch from higher input costs, as well as debt carrying charges.
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