Fed Chair Powell: Rates will rise until 'job is done' bringing down inflation

·3 min read

Federal Reserve Chairman Jerome Powell on Friday said the central bank’s job on lowering inflation is not done, suggesting that the Fed will continue to aggressively raise interest rates to cool the economy.

“We will keep at it until we are confident the job is done,” Powell said in remarks delivered at the Fed’s annual conference in Jackson Hole, Wyoming.

“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,” Powell said Friday.

Inflation data on Friday morning showed prices in America rose by 6.3% on a year-over-year basis in July, a notch down from the 6.8% pace measured in June. When stripping out food and energy, the Personal Consumption Expenditures Index showed prices rising by 4.6% compared to a year ago — still well above the Fed’s target of 2%.

The central bank has delivered four consecutive interest rate hikes over the last six months, moving in June and July to raise rates by 0.75%, the Fed's largest moves since 1994. By raising borrowing costs, the Fed hopes to dampen demand by making home buying, business loans, and other types of credit more expensive.

Short-term interest rates are now in a target range between 2.25% and 2.5%, which some Fed policymakers consider to be the so-called "neutral rate," or the level rates that is neither stimulative nor restrictive to economic activity.

Powell said more rate hikes will be needed, with “another unusually large” increase still on the table for the Fed’s next meeting in September. The Fed chair reiterated that “at some point,” the Fed will move to slow the pace of its price increases.

“In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause,” Powell said Friday.

The Fed chair said central banks need to move quickly, warning historical episodes of inflation have shown that delayed reactions from central banks tend to come with steeper job losses.

“Our aim is to avoid that outcome by acting with resolve now,” Powell said.

U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., the United States, on July 27, 2022. The U.S. Federal Reserve on Wednesday raised its benchmark interest rate by 75 basis points, the second in a row of that magnitude, as elevated inflation showed no clear sign of easing. (Photo by Liu Jie/Xinhua via Getty Images)
U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., the United States, on July 27, 2022. (Photo by Liu Jie/Xinhua via Getty Images)

With unemployment at a historically low 3.5% in July, Powell said the labor market remains strong but suggested that the Fed’s campaign to hike rates could restrict economic activity and lead to a “softer” labor market.

Combined with the crunch of expensive credit, Powell warned households and businesses may feel some pain as interest rates increases continue.

“These are the unfortunate costs of reducing inflation,” Powell said. “But a failure to restore price stability would mean far greater pain.”

The Fed chair’s speech is a focal point of the annual Jackson Hole conference, and tends to be a longer speech with bigger picture takeaways. But concerns about financial market interpretations of recent Fed moves were likely a factor in Powell’s decision to deliver a shorter and “more direct” speech this year.

The Fed’s next policy-setting meeting is scheduled September 20 and 21.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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