Jay Powell says Fed will ‘continue’ with hawkish inflation rhetoric

Jay Powell said the Federal Reserve ‘must keep going until the job is done’ as he used a speech in Jackson Hole to deliver his most hawkish message yet on central bank resolve US to control soaring inflation by raising interest rates.

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

“These are the unfortunate costs of reducing inflation,” Powell said as he predicted “some pain” for households and businesses, adding: “But a failure to restore price stability would mean far greater pain.”

The remarks were aimed at allaying doubts about the Fed’s determination to continue pressing the U.S. economy to stamp out inflation after it embarked on the most aggressive monetary policy tightening since 1981.

The U.S. stock market fell sharply after Powell’s speech, with the benchmark S&P 500 index falling 2.2% and the tech-heavy Nasdaq Composite dropping 2.7%.

Yields on short-term US government debt rose. On the policy-sensitive two-year Treasury note, the yield rose 0.04 percentage points to 3.41%. The yield on the 10-year note – which moves with growth and inflation expectations – was little changed at 3.02%. Yields increase when the price of a bond falls.

Line chart of performance as of Aug 26, 2022 (%) showing US stocks slipping after Fed's Powell hawkish comments

“We are taking strong and rapid action to moderate demand so that it better aligns with supply and to keep inflation expectations anchored,” Powell said.

Powell’s speech stood in stark contrast to the message he delivered at last year’s symposium, when he predicted that soaring consumer prices were a “transient” phenomenon stemming from supply chain issues. supply. It has since become clear that inflation is demand-driven and therefore likely to persist for longer.

The Fed chairman recalled the lessons of the 1970s, when the US central bank presided over a period of turmoil after making several policy mistakes and failing to control inflation. It forced Paul Volcker, who became Fed chairman in August 1979, to stifle the economy and cause more pain than would have been necessary had officials acted more quickly.

“The historical record strongly cautions against premature policy easing,” Powell said, explaining that interest rates are expected to remain at growth-stifling levels “for some time.”

The main lesson of this 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 tackling the growth of currencies. price.

He also pointed to the risk of inflation remaining too high for too long, setting off a chain reaction as people expect further price hikes.

“The longer the current episode of high inflation drags on, the more likely expectations of higher inflation will become entrenched,” Powell warned.

Financial markets have rallied in recent weeks as the Fed was expected to ease its efforts to rein in demand as economic data deteriorated further and concerns grew over the may be too heavy.

Last month, the central bank made its second consecutive hike of 0.75 percentage points, taking the federal funds rate to a new target range of 2.25% to 2.50%.

Fed officials are debating whether a third hike of the same magnitude will be needed at its September meeting, or whether they should opt for a half-point hike instead.

Powell’s comments prompted traders to change bets on how policymakers will ultimately raise interest rates. On Friday, futures markets hinted that the Fed would raise the federal funds rate to 3.82% by next March.

Futures markets also suggested that traders accept that the central bank could hold this higher rate for longer. This marked a notable deviation, given that investors had been reluctant to bet that the Fed would keep interest rates high in the face of a slowing economy.

“The Fed is ready to take on more short-term pain to secure the long-term gain of price stability,” said Ashish Shah, director of public investments at Goldman Sachs Asset Management. “You’re unlikely to see a dovish pivot to lower growth. They prefer to make sure that inflation and inflation expectations are sufficiently anchored.

Powell said at some point it would be appropriate to slow the pace of interest rate increases. But he dismissed recent data showing a slight slowdown in inflation as insufficient, adding: “A single month’s improvement is well below what the committee will need to see before we are confident that inflation is coming down. .”

Most officials maintain that they can control inflation without causing a painful recession. This goes against the consensus opinion of Wall Street economists, who predict at least a mild recession over the next year.

Economists also expect the US unemployment rate to rise above the 4.1% widely anticipated by FOMC members and regional bank presidents in June. The jobless rate, a beacon of hope as the economic picture darkens, sits at 3.5%, its lowest in several decades.

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

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