Reducing inflation will require economic hardship

Bringing down inflation will require economic hardship, Federal Reserve Chairman Jerome Powell said Friday in a tough speech that signals the Fed is nowhere near backing down on interest rate hikes.

Why is this important: In a much-anticipated speech, Powell was candid about the likelihood that lower inflation will come at the expense of the strong labor market that has benefited workers and looser trading conditions. But he signaled that the Fed has no intention of reversing course and cutting rates just because of such easing.

Driving the news: In a much-anticipated speech to leading economists gathered in Jackson Hole, Wyoming, on Friday, Powell was unusually succinct and direct, aiming to convey nothing but resolve in the central bank’s efforts to curb inflation.

  • What they say : “Reducing inflation will likely require an extended period of below-trend growth,” Powell said, according to a prepared text. “In addition, there will most likely be an easing of labor market conditions.”
  • “While higher interest rates, slower growth and weaker labor market conditions will reduce inflation, they will also hurt households and businesses. These are the unfortunate costs of reducing the inflation. But a failure to restore price stability would mean much more pain.”

He also pushed back against Wall Street expectations that the Fed could quickly reverse course and cut rates if the economy weakens in the coming years. This perception fueled a rally in stocks and other assets between July and mid-August.

  • “Restoring price stability will likely require tight policy to continue for some time,” Powell said. “The historical record strongly cautions against premature policy easing.”
  • “We are taking strong and rapid action to moderate demand so that it better aligns with supply and to keep inflation expectations anchored. We will continue until we are confident the job is done. “

State of play: Some indicators point to lower inflation in the months ahead as commodity prices fall, supply chain tensions improve and earlier Fed rate hikes hit the market housing and other sectors.

  • Recent inflation data has shown a dramatic slowdown in price growth. The consumer price index showed that inflation did not rise at all in July. And the Fed’s favorite inflation indicator, the personal consumption expenditure price index, showed a drop in consumer prices.

  • With his new speech, however, Powell says the Fed is no closer to declaring victory: “While the weaker inflation readings for July are welcome, the single-month improvement falls well short of that. what the Committee will have to see before we are confident that inflation is down.”

What to watch: However, Powell did not make it clear whether the Fed will raise interest rates by half a percentage point or 0.75 percentage points at its next policy meeting, saying only that the decision will depend on the “total incoming data” and perspectives.

To note : It was a relatively short speech in a setting where Powell’s comments are generally more discursive and far-reaching. The speech is 1,305 words, compared to an average of 3,140 words in his previous Jackson Hole speeches.

Go further: A Beginner’s Guide to the Fed’s Big Jackson Hole Conference

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