Fed chair Jerome Powell warns fight against inflation will bring ‘some pain’

At the Federal Reserve’s annual Jackson Hole Economic Symposium, chairman Jerome Powell telegraphed a greater sense of urgency about taming inflation than he has in previous remarks, calling price stability “the bedrock of our economy.”

In his keynote speech Friday morning, Powell said that the central bank’s “overarching focus” was on controlling rampant inflation.

“Our responsibility to deliver price stability is unconditional,” he said.

While Powell did not offer any indication whether the Fed’s extraordinary back-to-back rate hikes of 75 basis points each would be repeated at its rate-setting meeting next month, he sent the clearest message yet that the central bank was unequivocally committed to more restrictive policy in order to rein in inflation.

Powell added that the path to reducing inflation would not be quick or easy, saying that the task, “requires using our tools forcefully to bring demand and supply into better balance.”

Doing so, he said, would likely result in a period of slower growth for the US economy and a softer labor market.

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” said Powell.

In contrast to Powell’s warning, the Fed’s preferred measure of inflation showed that price increases slowed in July. The Personal Consumption Expenditures price index released earlier on Friday rose 6.3% from a year earlier, lower than the 6.8% year-over-year increase recorded in June.

Wall Street reacted negatively to the hawkish tone of the speech, with the major indices dropping on the prospect of a sustained period of higher interest rates and the associated economic pain — a word Powell invoked twice in his brief speech, referencing slower growth, higher unemployment and financial strain that tighter policy will inevitably visit on American homes and businesses.

“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” he said, pointing to the lessons officials learned from studying the Fed’s struggle to combat high inflation in the 1970s and 1980s.

Controlling inflation quickly is of paramount importance because inflation expectations can become a destructive self-fulfilling prophecy. “The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” Powell said.

“We don’t really understand the inflation expectation process,” said Randall Kroszner, former Fed governor and deputy dean for executive programs and economics professor at the University of Chicago Booth School of Business.

To a certain — albeit unquantifiable — extent, the perception that the Fed will have the intestinal fortitude to inflict pain on the economy in pursuit of its mandate is as important as the reality.

“Fortunately, the Fed has not lost credibility, and that’s something I think they will continue to rely on,” Kroszner said.

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