Powell vows to raise rates to fight inflation ‘until the job is done’

Federal Reserve Chairman Jerome Powell, in an appearance on Thursday, stressed the importance of bringing inflation down now before the public gets too used to higher prices and expects them as the norm.

In his latest comments underscoring his commitment to fighting inflation, Powell said expectations play a big role and were a critical reason why inflation was so persistent in the 1970s and 1980s.

“History cautions strongly against premature policy easing,” the central bank leader said in a question-and-answer session hosted by the Cato Institute, a Washington, DC-based libertarian think tank. “I can assure you that my colleagues and I are firmly committed to this project and will continue to do so until the job is done.”

The event was Powell’s last scheduled public appearance before the next Fed meeting on September 20-21.

Markets largely took the comments in stride, with major averages little changed at first on Wall Street. Treasury yields were mostly higher, with the two-year note, the most sensitive to Fed rate hikes, rising by almost five basis points to 3.49%. One basis point equals 0.01 percentage point.

The Federal Reserve has raised benchmark interest rates four times this year, with the fed funds rate now set in a range between 2.25% and 2.50%.

Fed hopes to rebalance labor market, says Fed Chairman Jerome Powell

Markets widely expect the rate-setting Federal Open Market Committee to enact a third consecutive 0.75 percentage point hike this month. In fact, that probability jumped to 86% during Powell’s comments, according to CME Group’s FedWatch tracker of fed-fund futures bets. Both Goldman Sachs and Bank of America told clients to expect that three-quarter increase.

One reason for acting aggressively is to make sure that inflation hovering at its highest rate in more than 40 years does not take root in the public consciousness, Powell said.

“The Fed has a responsibility for price stability, which means 2% inflation over time,” he said. “The longer inflation remains well above target, the greater the risk that the public will begin to see higher inflation as the norm, and that has the potential to increase the costs of reducing inflation.”

There have been some signs lately that at least the monthly path of inflation is slowing down. In particular, gasoline prices have been falling steadily after rising briefly over $5 per gallon in early summer.

The Fed gets its last look at inflation data before next week’s meeting, when the Bureau of Labor Statistics releases consumer price index data for August. Economists expect an overall 0.2% rise in the CPI after it was flat in July, according to FactSet. Yet year after year the increase in July was 8.5%and many areas outside of energy saw considerable increases.

Powell said that inflationary pressures are largely coming from specific causes of the pandemic. When inflation first began to rise in the spring of 2021, Powell and his colleagues dismissed it as “transient” and did not respond with any major policy moves before they began raising rates in March 2022.

However, he said it is now up to the Fed to continue to act until inflation falls and avoid the consequences of the 1970s, when the failure to implement an aggressive policy response allowed public expectations of high inflation to fester.

“We need to act now, frankly, forcefully, as we have done, and we must continue to do so until the job is done to prevent that,” he said.

Powell highlighted the strong labor market, with strong hiring levels persisting despite rate hikes, even as Fed officials expect the official unemployment rate to rise. He warned last month that the economy could experience “some pain” from tighter policy, but said slowing growth is needed to control inflation.

“What we hope to achieve is a period of below-trend growth that will bring the labor market back into better balance and bring wages back down to levels more consistent with 2% inflation over time,” he said. .

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