In his most earnest speech to date, Jerome Powell warned that the Fed will continue to raise rates as high as needed to bring inflation back down to 2 per cent.
Acknowledging the real downward impact this will have on economic growth and labour market conditions, the Fed chair told the Jackson Hole central banking conference that restoring price stability will undoubtedly hurt both households and businesses.
“Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labour market conditions,” Mr Powell said.
“While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation”.
A failure to restore price stability would mean “far greater pain”, Mr Powell said, alluding to the fact that the Fed does not intend to dial back its monetary policy quickly.
“We must keep at it until the job is done,” the chair said.
“The historical record cautions strongly against prematurely loosening policy,” he added.
The Fed chair was also clear that it is in the central bank’s remit of responsibility to deliver low and stable inflation.
“Our responsibility to deliver price stability is unconditional.”
“It is true that the current high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States. It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed's tools work principally on aggregate demand,” Mr Powell said.
“None of this diminishes the Federal Reserve's responsibility to carry out our assigned task of achieving price stability.”
Looking to September’s rate call, the chair flagged another large increase noting that July’s lower inflation readings fall "far short" of what the committee will need to see before it is confident that inflation is moving down.
“July's increase in the target range was the second 75-basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting,” Mr Powell said.
“We are now about halfway through the intermeeting period. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases,” he concluded.
Following Mr Powell’s address, markets have priced in a policy rate of between 3.75 per cent and 4 per cent by next March.
Commenting on the fall in US equities after Mr Powell’s speech, AMP economist Diana Mousina noted that sharemarkets were clearly hoping for some sign of a Fed pivot from raising rates aggressively.
“The risk for shares in the near term remains to the downside,” Ms Mousina noted.
Locally, the ASX opened down on Monday following the sell-off on Wall Street, clearly signalling a dislike for the Fed's message among equities.
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
