Powell: The Fed will aggressively use its tools to rein in inflation

LAST UPDATE: 17.39

Federal Reserve Chairman Jerome Powell spoke of a tough commitment Friday to contain inflation, warning that he expects the central bank to continue raising interest rates in a way that will cause “financial stress” on the US economy, according to the CNBC.

In his much-anticipated annual speech on monetary policy in Jackson Hole, Wyoming, Powell confirmed that the Fed will “forcefully use its tools” to rein in inflation that is still near a 40-year high.

Even with a run of four consecutive rate hikes totaling 2.25 percentage points, Powell said this is “not a point to stop” even though rates are likely around an area that is considered neither supportive nor constraining to growth .

“While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring pain to households and businesses,” Powell said. “That is the unfortunate cost of reducing inflation. But a failure to restore price stability would mean much greater pain,” he added.

The central banker’s remarks come amid signs that inflation may have peaked but shows no strong signs of abating.

Two indicators closely watched by the Fed, the consumer price index and the personal consumption expenditure price index, showed that prices were little changed in July, due in large part to a sharp drop in energy costs.

At the same time, other sectors of the economy are slowing down. Housing in particular is falling rapidly, and economists expect that the huge hiring growth of the past year and a half is likely to slow.

But Powell cautioned that the Fed’s focus is broader than a month or two of data and that it will continue to do so until inflation recedes closer to its long-term target of 2 percent.

“We are deliberately moving our policy to a level that will be restrictive enough to return inflation to 2 percent,” he said. Looking ahead, Powell added that “restoring price stability will likely require maintaining restrictive policy for some time. The historical record strongly cautions against premature policy easing.”

Powell’s speech was unusually short.

While Fed officials, including Powell, often use the Jackson Hole symposium as an opportunity to outline broad monetary policy changes, Powell’s remarks on Friday were just six pages long. In his introduction he noted that “my comments will be shorter, my focus narrower and my message more direct”.

“Price stability is the responsibility of the Federal Reserve and is the foundation of our economy,” he said. “Without price stability, the economy doesn’t work for anyone.”

The Fed is using a lesson from the past to guide its current policy.

In particular, Powell said the inflation of 40 years ago provides today’s Fed with three lessons: That central banks like the Fed are responsible for managing inflation, that expectations are critical and that “we have to keep going until the job is done “.

Powell noted that the Fed’s failure to act forcefully in the 1970s perpetuated the high inflation expectations that led to the draconian rate hikes of the early 1980s. At that time, then-Fed Chairman Paul Volcker, steered the economy into recession to rein in inflation.

While he has repeatedly said he does not believe a recession is an inevitable outcome for the US economy, Powell noted that managing expectations is crucial if the Fed is to avoid Volcker-style situations.

In the early 1980s, “it eventually took a long period of very tight monetary policy to arrest high inflation and begin the process of reducing inflation to the low and stable levels that had been the norm until the spring of last year,” he said. Powell. “Our aim is to avoid this outcome by acting decisively now.”

“Of course, inflation has almost everyone’s attention right now, which highlights a particular risk today: The longer the current period of high inflation lasts, the greater the likelihood that expectations of higher inflation will take hold,” Powell said.