Interest rates will rise until “the job” is done reducing inflation

Federal Reserve Chairman Jerome Powell said on Friday that the central bank’s job to reduce inflation is not done, suggesting the Fed will continue to raise interest rates aggressively to cool the economy.

“We will continue until we are sure the job is done,” Powell said in remarks delivered at the Fed’s annual meeting in Jackson Hole, Wyoming.

“While lower inflation readings for July are welcome, a one-month improvement falls well short of what the Committee will need to see before we can be confident that inflation is moving lower,” Powell said on Friday.

Inflation data on Friday morning showed prices in America rose 6.3% year-on-year in July, down from the 6.8% pace measured in June. Stripping out food and energy, the Personal Consumer Expenditure Index showed prices rose 4.6% from a year ago — still well above the Fed’s target of 2%.

The central bank has made four consecutive rate hikes in the past six months, moving in June and July to raise rates by 0.75 percent, the Fed’s biggest moves since 1994. By raising borrowing costs, the Fed hopes to reduce demand making home purchases, business loans and other types of credit more expensive.

Short-term interest rates are now in a target range of between 2.25% and 2.5%, which some Fed policymakers see as the so-called “neutral rate,” or the flat rate that is neither stimulatory nor restrictive to economic activity.

Powell said more rate hikes would be needed, with “another unusually large” increase still on the table for the Fed’s next meeting in September. The Fed chairman reiterated that “at some point,” the Fed will move to slow the pace of its rate hikes.

“In current conditions, with inflation running above 2 percent and the labor market extremely tight, estimates of long-term neutrality are not a place to stop or stop,” Powell said on Friday.

The Fed chairman said central banks must move quickly, warning that historical episodes of inflation have shown that delayed responses by central banks tend to be accompanied by larger job losses.

“Our goal is to avoid this outcome by acting decisively now,” Powell said.

U.S. Federal Reserve Chairman Jerome Powell attends a news conference in Washington, DC, the United States, July 27, 2022. The U.S. Federal Reserve on Wednesday raised its benchmark interest rate by 75 basis points, the second in a row this year size, as elevated inflation showed no clear signs of easing.  (Photo by Liu Jie/Xinhua via Getty Images)

US Federal Reserve Chairman Jerome Powell attends a news conference in Washington, the United States, on July 27, 2022. (Photo by Liu Jie/Xinhua via Getty Images)

With unemployment at a record low of 3.5% in July, Powell said the labor market remained strong but suggested the Fed’s rate hike campaign could curb economic activity and lead to a “softer” market work.

Coupled with tight credit, Powell warned that households and businesses could feel pain as interest rate hikes continue.

“That’s the unfortunate cost of deflation,” Powell said. “But a failure to restore price stability would mean much more pain.”

The Fed chairman’s speech is the centerpiece of the annual Jackson Hole conference and tends to be a longer speech with bigger pictures. However, concerns about financial markets’ interpretations of the Fed’s recent moves were likely a factor in Powell’s decision to deliver a shorter and “more direct” speech this year.

The Fed’s next policy-making meeting is scheduled for September 20 and 21.

Brian Cheung is a reporter covering the Fed, finance and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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