Jerome Powell: More Federal Reserve interest rate hikes likely

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

JACKSON HOLE, Wyo – Federal Reserve Chair Jerome Powell on Friday warned sharply about the Fed’s determination to fight inflation with stronger rate hikes: This will likely inflict pain on Americans in the form of a weaker economy and job losses.

The news hit Wall Street with a bang, sending the Dow Jones Industrial Average down more than 1,000 points for the day.

“Those are the unfortunate costs of fighting 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 had been hoping for a signal from Powell that the Fed may soon moderate its rate hikes later this year if inflation shows further signs of easing. But the Fed chair warned that that time may not be close, and stocks fell in response.

Escalating price hikes have plunged most Americans into the economy, even as the unemployment rate has fallen to a half-century low of 3.5%. It has also created political risks for President Joe Biden and Congressional Democrats in this fall’s election, as Republicans denounced Biden’s $1.9 trillion financial stimulus package approved last year as fueling inflation.

The Dow Jones average ended Friday, its worst day in three months, down 3%. The tech-heavy Nasdaq Composite lost nearly 4%. Shorter-term Treasury yields rose as traders built bets that the Fed would remain aggressive on interest rates.

Some on Wall Street expect the economy to slip into recession later this year or early next, after which they expect the Fed to turn around and cut rates.

However, a number of Fed officials have resisted this notion. Powell’s comments suggest the Fed intends to raise interest rates to around 3.75% to 4% by next year, but not so high as to slow the economy in hopes of slowing growth long enough to overcome high inflation.

“The idea they’re trying to pound into the market is that their approach makes a quick turn to (rate cuts) unlikely,” said Eric Winograd, an economist at asset manager AllianceBernstein. “You will remain firm even if it hurts.”

After Powell hiked its key short-term interest rate by a steep three-quarters point at each of its last two meetings — part of the Fed’s fastest string of rate hikes since the early 1980s — Powell said the Fed could ease that pace “by $1,000 at some point.” , suggesting such a slowdown is not around.

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

The Fed chair said that while the lower inflation readings reported for July were “welcome,” he added that “an improvement in a single month is well short of what[Fed policymakers]need to see before we do.” are confident that inflation is moving down.”

On Friday, an inflation gauge closely monitored by the Fed showed that prices actually fell 0.1% from June to July. Although prices rose 6.3% in July from 12 months earlier, that was down from a 6.8% year-on-year rise in June, the highest since 1982. The decline largely reflected lower gas prices.

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

“The historical record strongly warns of premature” rate cuts, he said. “We have to stay tuned until the job is done.”

What particularly worries Powell and other Fed officials is the prospect that inflation would become entrenched, prompting consumers and businesses to change behavior to sustain higher prices. For example, if workers demanded higher wages to cope with higher inflation, many employers would pass those higher labor costs on to consumers in the form of higher prices.

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

Powell’s speech was the marquee of the Fed’s annual economic symposium in Jackson Hole, the first time since 2019 that the central bankers’ conference will be held in person after two years of being held virtually during the COVID-19 pandemic.

Since March, the Fed has implemented the fastest pace of interest rate hikes in decades to curb inflation, which has punished households with rising costs for groceries, gas, rent and other necessities. The central bank has hiked interest rates by 2 full percentage points to a range of 2.25% to 2.5% in just four meetings.

These increases have resulted in higher costs for mortgages, auto loans, and other consumer and business loans. Home sales have plummeted since the Fed first signaled it would raise borrowing costs.

In June, Fed policymakers signaled that they expect interest rates to remain in a range of 3.25% to 3.5% by the end of 2022 and then rise further to 3.75% to 4% next year. If interest rates were to reach their projected levels by the end of this year, they would be at their highest levels since 2008.

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

His task was complicated by the bleak picture of the economy: On Thursday, the government said the economy contracted at an annual rate of 0.6% in April-June, the second straight quarter. Yet employers are still hiring quickly, and the number of people claiming unemployment benefits remains relatively small.

At their July meeting, Fed policymakers raised two conflicting concerns that highlighted their delicate task.

According to the minutes of that meeting, officials – who are not named – prioritized their fight against inflation. Still, some officials said there was a risk the Fed would raise borrowing costs more than necessary and risk a recession. As inflation moves closer to the Fed’s 2% target and the economy continues to weaken, these divergent views could be difficult to reconcile.

At last year’s Jackson Hole symposium, Powell listed five reasons why he thought inflation was “temporary.” But instead it has stuck, and many economists have noted that these remarks have not aged well.

Powell indirectly acknowledged that history early in his speech on Friday when he said, “At previous conferences in Jackson Hole, I have discussed broad issues such as the ever-changing structure of the economy and the challenges of conducting monetary policy.”

“Today,” he said, “my remarks will be shorter, my focus narrower, and my message more direct.” Jerome Powell: More Federal Reserve interest rate hikes likely

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