Powell: Fed could continue to raise interest rates sharply ‘for a while’

JACKSON HOLE, Wyoming — Fed Chair Jerome Powell delivered a grim message on Friday: The Fed is likely to impose more major rate hikes in the coming months and is resolutely focused on taming the highest inflation rate in four decades.

Powell also warned more explicitly than he has in the past that the continued tightening of credit by the Fed will hurt many households and businesses as higher interest rates further slow the economy and potentially lead to job losses.

“These are the unfortunate costs of curbing inflation,” he said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole. “But if price stability is not restored, that would mean a lot more pain.”

Investors had hoped for a signal that the Fed would soon moderate its rate hikes later this year if inflation showed further signs of easing. But the Fed chairman indicated that that time may not be near.

After raising key short-term interest rates by three-quarters of a point at each of the past two meetings — part of the Fed’s fastest series of rate hikes since the early 1980s — Powell said the Fed could lower that rate “at some point.” ”. ” — suggesting that such a slowdown is not imminent.

Powell said the size of the Fed’s rate hike at its next meeting in late September — whether it’s a half or three-quarters of a percentage point — will depend on inflation and jobs data. An increase of either magnitude, however, would be higher than the Fed’s traditional quarter-point hike, a reflection of how severe inflation has become.

The Fed chairman said that while the lower inflation figures reported for July are “welcome”, “one month’s improvement is not enough to see what the committee needs to see before we are sure that inflation is on the rise.” descending.”

He noted that the history of high inflation in the 1970s, when the central bank tried to counter high prices with only intermittent rate hikes, shows that the Fed must remain focused.

“The historic record strongly warns against premature” cuts in interest rates, he said. “We have to keep going until the job is done.”

Powell’s speech is the main event of the Fed’s annual economic symposium in Jackson Hole, the first time the central bankers’ conference has been held in person since 2019, after being virtual for two years amid the COVID-19 pandemic. .

Since March, the Fed has pushed through the fastest rate of rate hikes in decades to try to curb inflation, which has punished households with skyrocketing costs for food, gas, rent and other necessities. The central bank has raised its benchmark rate by 2 full percentage points in just four meetings to a range of 2.25% to 2.5%.

Those increases have led to higher costs for mortgages, auto loans and other loans for consumers and businesses. Home sales have fallen sharply since the Fed first announced it would raise borrowing costs.

In June, Fed policymakers said they expected their key rate to end between 3.25% and 3.5% in 2022 and rise further next year to between 3.75% and 4%. If rates reached their projected levels by the end of this year, they would be at their highest point since 2008.

Powell bets he can create a risky outcome: slowing the economy enough to ease inflationary pressures, but not so much as to create a recession.

His task was complicated by the murky picture of the economy: On Thursday, the government said the economy contracted 0.6% year-on-year in the April-June period, the second consecutive quarter of contraction. Even so, employers are still rapidly hiring and the number of people seeking unemployment support, a measure of layoffs, remains relatively low.

At the same time, inflation is still crushingly high, although showing some signs of easing, especially in the form of falling gas prices.

At its July meeting, Fed policymakers expressed two conflicting concerns that emphasized their delicate role.

According to the minutes of that meeting, the officials – who are not named – have prioritized their fight against inflation. Still, some officials said there was a risk that the Fed would raise borrowing costs more than necessary, risking a recession. If inflation moved closer to the Fed’s 2% target and the economy weakened further, those diverging views would be difficult to reconcile.

At last year’s Jackson Hole symposium, Powell listed five reasons why he thought inflation would be “transient.” But instead, it has persisted, and many economists have noted that those comments have not aged well.

Powell indirectly acknowledged that history at the beginning of his remarks Friday, when he said I’ve discussed broad topics at past Jackson Hole conferences, such as the ever-changing structure of the economy and the challenges of conducting monetary policy.

“Today,” he said, “my comments will be shorter, my focus narrower and my message more direct.”