As the Fed Battles Inflation, Jerome Powell Predicts "Some Pain" in the Future

Jerome Powell indicated that the U.S. central bank is likely to keep raising interest rates and maintain them elevated for a while to put an end to inflation, and he has pushed back against any assumption that the Fed will soon reverse course.

The chairman of the Federal Reserve, Jerome H. Powell, warned that the central bank's battle to fight back against the highest inflation in decades would come at a cost to employees and overall GDP. However, he highlighted that the Federal Reserve must continue to raise interest rates — and maintain them at elevated levels for a while —to avoid rapid price increases from becoming a more permanent characteristic of the American economy.

In a speech he gave on Friday, Mr. Powell stated, "Restoring price stability will take some time and involves employing our powers decisively to bring demand and supply into better balance." Although reduced inflation will result from higher interest rates, slower economic growth, and more favorable labor market circumstances, families and companies will nonetheless feel the negative effects of these factors.

After that, he continued by saying, "Unfortunately, these are the costs associated with lowering inflation."

Mr. Powell, who was speaking at the annual conference of the Federal Reserve Bank of Kansas City near Jackson, Wyoming, used his most closely watched speech of the year to highlight both the Fed's dedication to bringing inflation back under control and to emphasize that its policy moves so far have not been enough to achieve that goal. To put it another way, more will need to be done in order to slow the rapid increase in prices. Both of these points were emphasized in Mr. Powell's speech.

After Mr. Powell's statements, the stock market experienced a precipitous price drop. Every single sector of the index was in the red by the late morning, when the S&P 500 had dropped as much as 2 percent. Bond investors also swiftly changed their expectations for additional interest rate hikes from the Federal Reserve. As a result, the yield on the two-year Treasury note, sensitive to Fed policy changes, rose to 3.44 percent, which is near its highest level of the year.

The statements made by the chair of the Federal Reserve provided a signal that the central bank continues to be resolved in its fight against inflation and does not aim to depart from its plan to slow the economy in the near future. The comments made by Mr. Powell made it very plain that a bumpy landing would be a price worth paying in order to reestablish price stability in the United States. Central bankers have spent a significant portion of the past year stating that they intend to set the economy down softly.

Neil Dutta, who is in charge of U.S. economics at Renaissance Macro Research, said, "The process won't be painless, and I think he's being more forthright about that." "The likelihood of a recession is growing because they're telling you that a recession is a solution to the problem of inflation,"

Since the Federal Reserve raised interest rates in March from near zero to a range of 2.25 to 2.5 percent, investors have been waiting for any sign of how quickly and far the Fed may hike rates in the coming months. When interest rates are higher, borrowing money to build a house or develop a business becomes more expensive. This may eventually help to lower demand to the point that supply is able to catch up, resulting in a slowdown in price increases. This has the effect of reducing economic activity and cooling the employment market.

Mr. Powell did not say what pace lies ahead, which suggests that Fed officials will be scrutinizing incoming data to decide whether to make a third consecutive "unusually" hefty three-quarter point increase in interest rates at their meeting on September 20-21. He stated once again that it was likely that the Fed would pause its increases "at some point," but he also stated that central bankers had more work to do when it came to limiting the economy and getting inflation back under control.

The current level of interest rates is "not a place to stop or pause," according to the chair of the Federal Reserve. The Fed chair added that rates will probably need to remain high enough to weigh on the economy for "some time meaningfully" and that the "historical record cautions strongly against prematurely loosening policy."

The conclusion was obvious: the Fed is not even close to being in a position to declare triumph. Although Mr. Powell greeted a decrease in inflation in July as good news, he stated that it is not sufficient to decide that the Fed's aim is on the road to being done or that it has already been accomplished.

"Lower inflation readings for July are welcome; however, a single month's improvement falls far short of what the Committee will need to see before we can be confident that inflation is moving down," he said, referring to the Federal Open Market Committee, which is responsible for setting monetary policy. "While lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we can be

The index of personal consumption expenditures, which is the Federal Reserve's preferred method for measuring inflation, increased at a slower rate than in the previous month but was still much higher than the average inflation rate of 2 percent that the Fed aims to achieve. Some types of commodities are exhibiting encouraging signals of price decreases, but the majority of the recent slowdown has been driven by a reduction in the price of fuel, which is subject to significant swings in either direction.

One reason central bankers want to see more evidence that inflation is falling before they feel confident that it is moving in the correct direction is because of this particular reason. This is especially true considering that job gains and salary rises continue to be high, which suggests that the economy still possesses a large amount of underlying momentum.

The chair of the Federal Reserve used his platform, which was the most important speech at what is arguably the most important economic conference of the year, to lay out a set of reasons that the central bank must remain dedicated to lowering inflation even if its push causes pain in the short term. He called this "the most important speech at arguably the most important economic conference of the year." It was a message that appeared to be directed both at those who criticize the Fed and the general public when Americans all around the country are struggling to keep up with quickly rising costs.

Inflation is a worldwide phenomenon partially driven by a shortage of commodities due to pandemic-era plant closures in Asia and tangled supply chains. This has resulted in higher prices for consumers around the world. Politicians, such as Senator Elizabeth Warren, a Democrat from Massachusetts, have claimed that the instruments used by the Federal Reserve are an unpleasant approach to bringing down rising prices. Nevertheless, Mr. Powell made it abundantly apparent in his remarks that there is work to be done on bringing demand down, which is something that the Fed's instruments are capable of doing.

The chair of the Federal Reserve stated that it was essential to work toward eradicating inflation before the general public began to anticipate its occurrence. This is because inflation expectations can influence behavior in ways likely to lock in significant price increases.

Mr. Powell stated that "inflation has just about everyone's attention right now," underscores a particular risk that exists today: "The longer the current bout of high inflation persists, the greater the potential that higher inflation expectations may become entrenched," he added.

Once rapid price increases become a more permanent part of the economy, they would undoubtedly become much harder to squash. The price tag for persistent inflation could be rather expensive. This would need more economic pain in the form of lost jobs and the suffering of households in order to choke off demand.

Mr. Powell stated, "history demonstrates that the employment costs of bringing down inflation are likely to increase with delay." He cited this historical evidence in his statement. "By taking decisive action right now, it is our intention to prevent that result from occurring."

The most important takeaway from Mr. Powell's comments is that he and his colleagues are committed to bringing inflation down, even if doing so requires making some uncomfortable sacrifices in the short term. The last line of his speech even appeared to refer to his long-ago predecessor, Paul Volcker, who dramatically increased interest rates in the 1980s to stifle inflation and detailed his fight against rapid inflation in an autobiography titled "Keeping at It" that was published in 2018.

Mr. Powell stated, "We will stick at it until we are convinced that the job has been done."

                      Fed's Powell warns of 'some pain' ahead as central bank fights inflation