In a speech on Thursday, Federal Reserve Chairman Jerome Powell underlined the significance of bringing inflation down quickly before the public grows accustomed to higher prices and starts to accept them as the usual.
Powell said expectations play a significant role and are essential to understanding why inflation was so persistent in the 1970s and 1980s in his most recent remarks reiterating his commitment to the fight against inflation.
In response to a question from the Washington, D.C.-based Cato Institute, a libertarian think tank, the head of the central bank stated, “History clearly recommends against prematurely easing policy.” I can tell you that my coworkers and I are firmly devoted to this project and that we will work on it nonstop until it is completed.
Powell made his final scheduled public appearance at the event prior to the Fed’s upcoming meeting on September 20–21.
Markets mostly ignored the remarks, with major indexes on Wall Street showing little change in the early going. The two-year note, which is most vulnerable to Fed rate hikes, increased by roughly 5 basis points to 3.49% as Treasury yields generally increased. 0.01 percentage points make up a basis point.
The fed funds rate is presently set in a range between 2.25% and 2.50% after the Fed increased benchmark interest rates four times this year.
The Federal Open Market Committee, which sets interest rates, is largely expected to adopt a third consecutive 0.75 percentage point hike when it meets later this month. According to the FedWatch tracker of bets on fed funds futures maintained by the CME Group, that likelihood actually increased to 86% during Powell’s remarks.
To avoid the public’s awareness of inflation, which is currently at its highest pace in more than 40 years, is one rationale for acting forcefully, according to Powell.
The Fed is in charge of maintaining price stability, which he defined as 2% inflation over time. The greater the risk that the public starts to accept higher inflation as the usual, which could increase the costs of bringing prices down, the longer inflation remains much over target.
There have recently been some indications that inflation, at least on a monthly basis, is slowing down. Particularly, the cost of gas has been progressively declining since briefly climbing above $5 per gallon earlier in the summer.
The Bureau of Labor Statistics will issue the consumer price index statistics for August, giving the Fed its final look at inflation data before its meeting the following week. The CPI is anticipated to rise by 0.2% overall, according to economists.
“. However, the growth over the previous year in July was 8.5%, and several industries outside of energy also enjoyed significant growth.
Powell claimed that the pandemic-specific reasons account for the majority of the inflationary pressures. Prior to beginning to raise interest rates in March 2022, Powell and his colleagues discounted the rise in inflation in the spring of 2021 as “transitory” and made no significant policy adjustments in response.
However, he asserted that the Fed must now continue acting until inflation declines in order to avoid repeating the mistakes of the 1970s, when a lack of an assertive policy response allowed for the emergence of public expectations for high inflation.
To prevent it, he said, “We need to act now, forthrightly, and firmly, as we have been, and we need to remain at it until the job is done.”
Powell emphasized the robust labor market, noting that solid hiring levels have persisted despite rate rises and the Fed’s expectation that the official unemployment rate will rise. He stated last month that tighter policy may cause “some pain” to the economy, but that slowing growth is vital to control inflation.
“What we expect to achieve is a period of growth below trend,” he added, “which will lead to the labor market getting back into better balance and that will drive wages back down to levels that are more consistent with 2% inflation over time.”
