Jerome Powell: More Federal Reserve interest rate hikes likely

Federal Reserve Chairman Jerome Powell has acknowledged that the Fed’s continued credit crunch will hurt many consumers.

JACKSON HOLE, Wyo — Federal Reserve Chairman Jerome Powell on Friday issued a stark warning about the Fed’s determination to fight inflation with steeper interest rate hikes: it will likely cause suffering for investors. Americans in the form of a weaker economy and job losses.

The message landed with a thud on Wall Street, sending the Dow Jones Industrial Average plummeting more than 1,000 points for the day.

“These are the unfortunate costs of reducing inflation,” Powell said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole. “But a failure to restore price stability would mean far greater pain.”

Investors were hoping for a signal from Powell that the Fed could soon moderate rate hikes later this year if inflation showed further signs of slowing. But the Fed chairman signaled that time may not be near, and stocks fell in response.

The meteoric price increases soured most Americans on the economy, even as the unemployment rate fell to a half-century low of 3.5%. It has also created political risks for President Joe Biden and congressional Democrats in the election this fall, with Republicans denouncing Biden’s $1.9 trillion financial relief package, approved last year, as having fueled inflation.

The Dow Jones average ended down 3% on Friday, its worst day in three months. The tech-heavy Nasdaq composite lost nearly 4%. Short-term Treasury yields climbed as traders bet the Fed would stay 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 course and cut rates.

A number of Fed officials, however, pushed back on that idea. Powell’s remarks suggest the Fed is aiming to raise its benchmark rate – to around 3.75% to 4% by next year – but not to the point of slowing the economy, hoping to slow the economy. growth long enough to overcome high inflation.

“The idea they’re trying to drive into the head of the market is that their approach makes a quick pivot to (rate cuts) unlikely,” said Eric Winograd, economist at asset manager AllianceBernstein. “They’ll stay tight even when it hurts.”

After raising its key short-term rate by three-quarters of a point in each of its last two meetings — part of the Fed’s fastest series of hikes since the early 1980s — Powell said the Fed could speeding up this pace “at some point”, suggesting that such a slowdown is not near.

Powell said the extent of the Fed’s rate hike at its next meeting in late September — whether it’s half or three-quarters of a percentage point — will depend on data on inflation and the use. A hike of either size, however, would top the Fed’s traditional quarter-point hike, reflecting how severe inflation has become.

The Fed Chairman said that while the weaker inflation readings that were reported for July were “welcome,” he added that “the single-month improvement is well below what (the Fed policymakers) will have to see before we are convinced that inflation is coming down.”

On Friday, a closely watched inflation gauge by the Fed showed that prices actually fell 0.1% from June to July. Although prices jumped 6.3% in July from 12 months earlier, this is down from the 6.8% year-on-year jump in June, which was the highest since 1982. The decline largely reflects lower gasoline prices.

In his Friday speech, Powell noted that the history of high inflation in the 1970s, when the central bank sought to counter high prices with only intermittent rate hikes, shows the Fed needs to stay focused.

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

What particularly worries Powell and other Fed officials is the prospect of inflation taking root, causing consumers and businesses to change their behavior in ways that perpetuate higher prices. If, for example, workers began to demand higher wages to match higher inflation, then many employers would pass on these higher labor costs to consumers in the form of higher prices.

Many analysts are speculating that Fed officials want to see about six months of lower monthly inflation readings, similar to July’s, before halting their rate hikes.

Powell’s speech was the highlight of the Fed’s annual economic symposium in Jackson Hole, the first time the conference of central bankers has been held in person since 2019, after it went virtual for two years during the pandemic. of COVID-19.

Since March, the Fed has implemented its fastest pace of rate hikes in decades in an attempt to rein in inflation, which has hurt households with soaring costs for food, gas, rent and other necessities. The central bank raised its policy rate by 2 percentage points in just four meetings, bringing it to a range of 2.25% to 2.5%.

These increases have led to higher costs for mortgages, auto loans and other consumer and business borrowing. Home sales have fallen since the Fed first announced it would raise borrowing costs.

In June, Fed policymakers indicated that they expect their key rate to end 2022 in a range of 3.25% to 3.5%, then rise again next year between 3 .75% and 4%. If rates reached their expected level at the end of this year, they would be at their highest since 2008.

Powell is betting he can engineer a high-risk outcome: slowing the economy enough to ease inflationary pressures, but not so much as to trigger a recession.

Its task was complicated by the murky picture of the economy: On Thursday, the government said the economy had contracted at an annual rate of 0.6% in the April-June period, the second quarter consequent contraction. Yet employers are still hiring quickly and the number of people applying for unemployment assistance, a measure of layoffs, remains relatively low.

At its July meeting, Fed policymakers voiced two competing concerns that shed light on their delicate task.

According to the minutes of that meeting, the officials – who are not identified by name – prioritized their fight against inflation. Still, some officials said there was a risk the Fed would raise borrowing costs more than necessary, risking a recession. If inflation moves closer to the Fed’s 2% target and the economy weakens further, these differing views could become difficult to reconcile.

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

Powell indirectly acknowledged this history at the start of his remarks on Friday, when he said that “At past Jackson Hole conferences I have discussed general topics such as the ever-changing structure of the economy and the challenges of the conduct of monetary policy”.

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

Stephen V. Lee