Aug 26, 2022 - Economy

Fed chief Powell: Bringing down inflation will require economic pain

Federal Reserve Chair Jerome Powell

Fed chair Jerome Powell at dinner Thursday night at the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming. Photo: David Paul Morris/Bloomberg via Getty Images

Bringing down inflation will require some economic pain, Federal Reserve chair Jerome Powell said on Friday in a tough-talking speech that signals the Fed is nowhere near relenting on interest rate increases.

Why it matters: In a much-awaited address, Powell was blunt about the likelihood that bringing down inflation will come at the expense of the solid labor market that's been beneficial to workers and softer business conditions. But he indicated the Fed does not intend to reverse course and cut rates just because of such softening.

Driving the news: In a much-awaited speech before leading economists gathered in Jackson Hole, Wyoming, on Friday, Powell was uncommonly succinct and direct, aiming to convey nothing but resolve in the central bank's efforts to bring down inflation.

What they're saying: "Reducing inflation is likely to require a sustained period of below-trend growth," Powell said, according to a prepared text. "Moreover, there will very likely be some softening of labor market conditions."

  • "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. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

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

  • "Restoring price stability will likely require maintaining a restrictive policy stance for some time," Powell said. "The historical record cautions strongly against prematurely loosening policy."
  • "We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done."

State of play: Some indicators have pointed to inflation receding in the coming months, as commodity prices have fallen, supply chain strains improve, and earlier Fed rate increases hammer the housing market and other sectors.

  • Recent data on inflation have shown a dramatic slowdown in price growth. The Consumer Price Index showed inflation did not rise at all in July. And the Fed's preferred gauge of inflation, the Personal Consumption Expenditures price index, showed consumer prices falling.
  • With his new speech, however, Powell is stating that the Fed is not close to declaring victory: "While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down."

What to watch: However, Powell did not give a clear indication of whether the Fed will raise interest rates by half a percentage point or 0.75 percentage point at its next policy meeting, saying only that the decision will depend on the "totality of the incoming data" and outlook.

Of note: It was a relatively short speech in a setting where Powell's comments are usually more discursive and wide-ranging. The speech clocks in at 1,305 words, down from an average of 3,140 words in his previous Jackson Hole addresses.

Go deeper: A beginner's guide to the Fed's big Jackson Hole conference

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