JACKSON HOLE, Wyoming — Federal Reserve Chairman Jerome Powell issued a stark warning Friday about the Fed’s determination to fight inflation with sharper rate hikes: It will likely hurt Americans in the form of a weaker economy and job losses.
The message landed on Wall Street with a thud, sending the Dow Jones Industrial Average down more than 1,000 points for the day.
“These are the unfortunate costs of curbing inflation,” Powell 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 from Powell that the Fed could soon moderate its rate hikes later this year if inflation showed further signs of easing. But the Fed chairman hinted that that time may not be near, and stocks plunged in response.
Runaway price increases have soured most Americans in the economy, even as the unemployment rate has plunged to a half-century low of 3.5%. It has also brought political risks to President Joe Biden and congressional Democrats in this fall’s election, with Republicans denouncing Biden’s $1.9 trillion financial aid package approved last year as fueling inflation.
The Dow Jones average ended Friday at 3%, the worst day in three months. The tech-heavy Nasdaq composite lost nearly 4%. Shorter Treasury yields rose as traders built bets on the Fed to remain aggressive with rates.
Some on Wall Street expect the economy to slide into recession later this year or early next year, after which they expect the Fed to reverse itself and cut interest rates.
However, a number of Fed officials have opposed that idea. Powell’s comments suggested the Fed is aiming to raise its benchmark interest rate — to about 3.75% to 4% by next year — but not so high as to slow the economy, hoping to slow growth long enough to sustain the high. curb inflation.
“The idea they’re trying to hammer into the head of the market is that their approach makes a rapid reversal to[rate cuts]unlikely,” said Eric Winograd, an economist at asset manager AllianceBernstein. “They will stay tight even if it hurts.”
After raising key short-term interest rates by a precipitous three-quarters point during each of the past two meetings — part of the Fed’s fastest series of hikes since the early 1980s — Powell said the Fed could slow that pace “up on 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 numbers reported for July are “welcome,” he added that “the one-month improvement is not what[Fed policymakers]will need to see before we can be sure.” that inflation will go down.”
On Friday, an inflation gauge closely monitored by the Fed showed that prices fell as much as 0.1% from June to July. While prices rose 6.3% in July from 12 months earlier, that was a 6.8% year-on-year decline in June, the highest since 1982. The decline was largely the result of lower gas prices.
In his speech Friday, Powell 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 needs to stay focused.
“The historic record strongly warns against premature” cuts in interest rates, he said. “We have to keep going until the job is done.”
Of particular concern to Powell and other Fed officials is the prospect of inflation becoming entrenched, causing consumers and businesses to change their behavior in ways that would perpetuate higher prices. For example, if workers started demanding higher wages to match higher inflation, many employers would pass those higher labor costs on to consumers in the form of higher prices.
Many analysts speculate that Fed officials want to see about six months of lower monthly inflation rates, similar to July’s, before they stop their rate hikes.
Powell’s speech was 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 going virtual for two years during the COVID-19 pandemic. .
Since March, the Fed has implemented the fastest rate of rate hikes in decades to try to curb inflation, punishing 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 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.”
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