The message landed with a thud on Wall Street, sending the Dow Jones Industrial Average down 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 failing to restore price stability would mean much greater pain.”
Investors were hoping for a signal from Powell that the Fed could soon moderate its rate hikes later this year if inflation shows more signs of easing. But the Fed chairman indicated that time may not be near and stocks fell in response.
Runaway price increases have hit the economy of most Americans, even as the unemployment rate has fallen to a half-century low of 3.5 percent.
It has also created political risks for President Joe Biden and congressional Democrats in this fall’s election, with Republicans denouncing Biden’s $1.9 trillion (Aus$2.7 trillion) financial support package. , passed last year, fueled inflation.
The Dow Jones average ended down 3 percent on Friday, its worst day in three months. The high-tech Nasdaq Composite lost nearly 4 percent. Short-term Treasury yields rose as traders bet the Fed would remain aggressive on rates.
Some on Wall Street expect the economy to slip into a recession late this year or early next, after which they expect the Fed to back down and cut rates.
However, several Fed officials have opposed that idea. Powell’s comments suggested the Fed is aiming to raise its benchmark rate – around 3.75% to 4% next year – but not so much as to sink the economy, hoping to slow growth enough to to overcome high inflation.
“The idea that they are trying to instill in the market head is that their approach makes a quick turn to (rate cuts) unlikely,” said Eric Winograd, an economist at asset manager AllianceBernstein. “They will stay tight even when it hurts.”
After raising his key short-term rate by three-quarters of a point at each of his last two meetings, part of the Fed’s fastest series of hikes since the early 1980s, Powell said the Fed could cut that pace “at some point,” suggesting that such a slowdown is nowhere near.
Powell said the size of the Fed’s rate hike at its next meeting in late September, whether it’s half a percentage point or three-quarters of a percentage point, will depend on inflation and employment data. However, a hike of any size would exceed the Fed’s traditional quarter-point hike, a reflection of how severe inflation has become.
The Fed chairman said that while the lower inflation readings reported for July have been “welcome,” he added that “a single month’s improvement is well below what (Fed policymakers ) will need to see before we are sure that inflation is coming down.”
On Friday, an inflation gauge that is closely monitored by the Fed showed that prices actually fell 0.1 percent from June to July. Although prices rose 6.3 percent in July from the previous 12 months, that was down from the 6.8 percent year-over-year increase in June, which had been the highest since 1982. The drop largely reflected the lowest gasoline 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 rate hikes, shows that the Fed must stay focused.
“The historical record strongly cautions against cutting” interest rates prematurely, he said. “We have to keep it up until the job is done.”
What particularly worries Powell and other Fed officials is the possibility of inflation taking hold, prompting consumers and businesses to change their behavior in ways that perpetuate higher prices. If, for example, workers began demanding higher wages to match higher inflation, many employers would pass on those higher labor costs to consumers in the form of higher prices.
Many analysts speculate that Fed officials want to see about six months of lower monthly inflation readings, similar to those in July, before stopping 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 being virtual for two years during the COVID pandemic. -19.
Since March, the Fed has implemented its fastest pace of rate hikes in decades to try to rein in inflation, which has punished households with skyrocketing costs for food, gasoline, rent and other necessities. The central bank raised its benchmark rate by a full 2 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 business and consumer loans. Home sales have slumped since the Fed first signaled it would raise borrowing costs.
In June, Fed policymakers signaled that they expected their key rate to end 2022 in a range of 3.25% to 3.5% and then rise further next year to between 3.75% and 4%. If rates were to reach their projected level by the end of this year, they would be at the highest point since 2008.
Powell is betting he can engineer a high-risk outcome: slow the economy enough to ease inflationary pressures but not enough to trigger a recession.
Their task has been complicated by the murky outlook for the economy: On Thursday, the government said the economy shrank at an annual rate of 0.6 percent in the April-June period, the second straight quarter of contraction. However, employers are still hiring quickly and the number of people applying for jobless aid, a measure of layoffs, remains relatively low.
At their July meeting, Fed policymakers raised two conflicting concerns that highlighted their delicate task.
According to the minutes of that meeting, the officials – whose names are not identified – have prioritized the 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 moved closer to the Fed’s 2% target and the economy weakened further, those divergent views could become difficult to reconcile.
Unopened first-gen iPod and iPhone sell for record price
At last year’s Jackson Hole symposium, Powell listed five reasons why he thought inflation would be “transient.” Instead, however, he has persisted, and many economists have noted that such comments have not aged well.
Powell obliquely acknowledged that history at the start of his remarks Friday, saying that “in previous Jackson Hole conferences, I have discussed broad topics 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 more limited, and my message more direct.”