Will Need Tight Monetary Policy For Some Time To Tame Inflation: Powell At Jackson Hole
Federal Reserve Chair Jerome Powell while delivering his speech from the Fed’s annual economic symposium in Jackson Hole said the Fed will likely impose more large interest rate hikes in coming months and is resolutely focused on taming the highest inflation in US in four decades.
Powell warned that the move will bring some pain to households and businesses. “These are the unfortunate costs of reducing inflation but failing to restore price stability would mean far greater pain,” he said.
However, the commentary on the overall economy was positive. Powell acknowledged that the latest economic data has been mixed but “in my view, our economy continues to show strong underlying momentum.” He said the labour market is particularly strong but it is clearly out of balance with demand for workers substantially exceeding supply.
“Inflation is running well above 2 per cent and high inflation has continued to spread through the economy,” he added.
Commenting on the slight easing of inflation in the month of July, Powell said that the lower inflation readings for July are certainly welcome but a single month improvement falls far short of what the Committee will see before we are confident that inflation is moving down.
“So, we are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 per cent,” he said.
On the rate hike in September, Powell said the September meeting will depend on the totality of the incoming data and the evolving outlook. “The historical record cautions strongly against prematurely” lowering interest rates, he said. “We must keep at it until the job is done,” he stated.
Powell’s remarks at the Jackson Hole Symposium, which gathers top policymakers from around the world, come as US central bankers confront the highest inflation in 40 years. Officials were slow to spot the risk and are now moving aggressively to keep prices from accelerating further. Officials raised rates by 75 basis points at their last two meetings and signalled the same could be on the table again when they gather next month.
Powell listed three lessons on which the Federal Reserve is drawing upon. The first lesson, he said, is that central banks can and should take responsibility for delivering low and stable inflation.
“The current high inflation in US is the product of strong demand and constrained supply, and the defense tools of the Fed work principally on aggregate demand. None of this diminishes the Federal Reserve's responsibility to carry out our assigned task of achieving price stability. There is clearly a job to do in aligning demand with supply and we are committed to doing that job,” Powell said.
The second lesson, Powell said, is that the public's expectations about future inflation can play an important role in setting the path of inflation over time. Today, by many measures, longer-term inflation expectations appear to remain well anchored.
“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,” said Powell.
He recalled 1970s and said that as inflation climbed, the anticipation of high inflation became entrenched in the economic decision making of households and businesses.
“Inflation has just about everyone's attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” stated Powell.
Lastly, Powell said that the Federal Reserve must keep at it until the job is done. He said that 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.
“Our aim is to avoid that outcome by acting with resolve now,” Powell said.
Post Powell’s speech, Wall Street slumped.
Wall Street’s main indices extended losses as traders assessed Powell’s comments which suggested that the central bank will keep raising interest rates to tame inflation.
As of 8:59 pm IST, The Dow Jones Industrial Average dropped 526.26 points or 1.58 per cent. The S&P 500 fell 1.92 per cent and the Nasdaq Composite slid 2.46 per cent.
The Federal Reserve has already hiked its key overnight interest rate four times this year to tame the worst inflation in nearly four decades. The hikes have hurt the US housing industry, where more expensive mortgage rates have slowed activity. But the job market has remained strong reflecting some green shoots in the economy.
Critics have slammed the Fed for failing to anticipate the inflationary surge, which the Fed initially viewed as transitory. Powell told the conference in his address a year ago that price pressures were 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 their 2 per cent target.
