The head of the US Federal Reserve has warned US families to expect “pain” as he rallied central bankers around the world to continue cracking down on inflation with aggressive interest rate hikes.
Jerome Powell vowed to “forcefully” use all the Fed’s tools to deal with spiraling US price increases, regardless of the negative consequences for the economy and households.
Central bankers must keep raising interest rates to fight inflation or risk letting price rises hit the economy for years to come, he warned.
Mr. Powell delivered the message in his speech at the annual Jackson Hole Symposium, an influential gathering of central bankers and officials.
The world’s most powerful interest rate regulator sent stock markets tumbling as he predicted a prolonged economic slowdown and sustained higher borrowing costs, which “brings some pain to households and businesses”.
He said the lessons of the 1970s and 1980s should not be forgotten. If central banks are too slow to act or waver in their resolve, inflation risks gathering steam and becoming even harder to eradicate, Mr. Powell said.
“Restoring price stability will take some time and requires the dynamic use of our tools to better balance demand and supply,” he said.
“Reducing inflation is likely to require a sustained period of below-trend growth.
“While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of deflation. But a failure to restore price stability would mean much greater pain.”
The Fed has raised interest rates rapidly in recent months, starting with an increase from 0.25% to 0.5% in March and then moving to 1% in May, 1.75% in June and 2.5% last year. month.
Mr. Powell said more jumps of 0.75 percentage points may be on the way, despite early signs that inflation may have peaked. Annual US consumer price inflation slowed from 9.1% in June to 8.5% in July.
“Restoring price stability will likely require maintaining a restrictive policy for some time. The historical record strongly warns against premature policy easing,” the Fed chairman said.
Financial markets slid as investors got the message that the Fed won’t change course just because the economy is slowing.
The S&P 500 index of leading stocks fell more than 2% before recovering some of those losses.
The tech-focused NASDAQ lost 2.7 percent as the prospect of higher interest rates holding steady weighed on the outlook for its growth-oriented stocks.
Andrew Hollenhorst, an economist at Citi, said he expects another rate hike of 0.75 percentage points next month, which would take the federal funds rate to 3.25 percent, the highest rate since early 2008.
The speech “left no room” for doves who believe interest rates do not need to rise much further, as “Powell and other officials increasingly signal that economic conditions will need to tighten further until the economy slows more substantially.” he said.
Mr. Powell said it was important to learn from “the high and volatile inflation of the 1970s and 1980s and the low and stable inflation of the past quarter century,” citing the experience of Paul Volcker, who served in the role of in 1979. to 1987 and is credited with painfully but successfully squeezing inflation out of the economy through higher interest rates.
One of the lessons from that time, he said, is that central banks need to show that they are outpacing inflation so that households and businesses stop waiting for high inflation, which in turn can become self-fulfilling as workers they demand higher wages and businesses regularly raise prices.
“The longer the current period of high inflation continues, the more likely it is that higher inflation expectations will take hold,” Mr Powell said. “We must maintain it until the job is done.”
Andrew Bailey, the Governor of the Bank of England, has promised to tackle inflation “no ifs, no buts”, while Christine Lagarde of the European Central Bank has pledged “decisive and sustained” action to bring rate rises back under control. prices.