He emphasized that addressing inflation would be painful and would take time
US Federal Reserve Chairman Jerome Powell warned that the central bank’s mission to tame inflation will lead to “some pain” for American families as the Fed turns to using its “tools aggressively” by raising interest rates.
Powell said, during the “Jackson Hole” seminar, that the path to reducing inflation will not be quick or easy, adding that the task “requires the use of our tools aggressively to achieve a better balance between supply and demand.” He said doing so would likely lead to some weakness in the US economy and the labor market.
“While high interest rates, slow growth, and weak labor market conditions will bring inflation down, they will cause some pain for households and businesses,” Powell added.
Commenting on Powell’s comments, Rob Haworth, chief investment analyst at US Bank Wealth Management, said that these statements can be interpreted as a willingness to see the unemployment rate rise slightly to reach this end of the demand reduction. A weak labor market generally constrains consumer demand, as households conserve cash in anticipation of potential job losses.
While Powell said, “Our responsibility to achieve price stability is unconditional,” but he did not provide any indication as to whether the unusual increase in interest rates by the Federal Reserve of 75 basis points will be repeated at the rate-setting meeting next month. It also sent a clear message that the US central bank is unequivocally committed to further rate hikes in order to rein in inflation.
“These are the unfortunate costs of lowering inflation…but failure to restore price stability will mean much more pain,” he added, noting the lessons officials learned from studying the Fed’s struggle to combat high inflation in the 1970s and 1980s.
“Powell is clearly saying that fighting inflation right now is more important than supporting growth,” says Jeffrey Roach, chief economist at LBL Financial.
He pointed out that controlling inflation quickly is of paramount importance because inflation expectations can become a devastating self-fulfilling prophecy. Powell said: “The longer the current wave of high inflation continues, the greater the chance that expectations of high inflation will become entrenched.”
But contrary to Powell’s warning, the Fed’s preferred inflation gauge showed that rate increases slowed in July. The PCE price index rose 6.3% from a year earlier, lower than the 6.8% annual increase recorded in June.
Wall Street fell, on Friday, to close significantly lower, as investors wishing to adopt lower interest rates were disappointed with Federal Reserve Chairman Jerome Powell, who indicated that the US central bank would continue to raise interest rates to curb inflation.
The Standard & Poor’s 500 index closed 140.83 points, or 3.35%, to 4058.29 points, the Nasdaq Composite Index decreased 496.39 points, or 3.93%, to 12,142.88 points, and the Dow Jones Industrial Average fell 1003.74 points, or 3.01%, to 3,2288.04 points. , according to Reuters.