Powell: Fed’s inflation fight could bring ‘pain,’ job losses

Federal Reserve Chair Jerome Powell delivered a stark warning Friday about the Fed’s determination to fight inflation with more sharp interest rate hikes: It will likely cause pain for Americans in the form of a weaker economy and job losses.

The message landed with a thud on Wall Street, sending the Dow Jones Industrial Average down more than 1,000 points for the day.

“These are the unfortunate costs of reducing inflation,” Powell said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole. “But a failure to restore price stability would mean far greater pain.”

Federal Reserve Chairman Jerome Powell speaks during a news conference at the Federal Reserve Board building in Washington on July 27, 2022. (Manuel Balce Ceneta/)

Investors had been hoping for a signal from Powell that the Fed might soon moderate its rate increases later this year if inflation were to show further signs of easing. But the Fed chair indicated that time may not be near, and stocks tumbled in response.

Runaway price increases have soured most Americans on the economy, even as the unemployment rate has fallen to a half-century low of 3.5%. It has also created political risks for President Biden and congressional Democrats in this fall’s elections, with Republicans denouncing Biden’s $1.9 trillion financial support package, approved last year, as having fueled inflation.

The Dow Jones average finished down 3% on Friday, its worst day in three months. The tech-heavy Nasdaq composite shed nearly 4%. Shorter-term Treasury yields climbed as traders built up bets for the Fed to stay aggressive with rates.

Some on Wall Street expect the economy to fall into recession later this year or early next year, after which they expect the Fed to reverse itself and reduce rates.

A number of Fed officials, though, have pushed back against that notion. Powell’s remarks suggested that the Fed is aiming to raise its benchmark rate — to about 3.75% to 4% by next year — yet not so high as to tank the economy, in hopes of slowing growth long enough to conquer high inflation.

“The idea they are trying to hammer into the market’s head is that their approach makes a rapid pivot to (rate cuts) unlikely,” said Eric Winograd, an economist at asset manager AllianceBernstein. “They are going to stay tight even when it hurts.”

After raising its key short-term rate by a steep three-quarters of a point at each of its past two meetings — part of the Fed’s fastest series of hikes since the early 1980s — Powell said the Fed might ease up on that pace “at some point,” suggesting that any such slowing isn’t near.

Powell said the size of the Fed’s rate increase at its next meeting in late September — whether one-half or three-quarters of a percentage point — will depend on inflation and jobs data. An increase of either size, though, would exceed the Fed’s traditional quarter-point hike, a reflection of how severe inflation has become.

The Fed chair said that while lower inflation readings that have been reported for July have been “welcome,” he added that, “a single month’s improvement falls far short of what (Fed policymakers) will need to see before we are confident that inflation is moving down.”

On Friday, an inflation gauge that is closely monitored by the Fed showed that prices actually declined 0.1% from June to July. Though prices did jump 6.3% in July from 12 months earlier, that was down from a 6.8% year-over-year jump in June, which had been the highest since 1982. The drop largely reflected lower gas prices.

In his speech Friday, Powell noted that the history of high inflation in the 1970s, when the central bank sought to counter high prices with only intermittent rate hikes, shows that the Fed must stay focused.

“The historical record cautions strongly against prematurely” lowering interest rates, he said. “We must keep at it until the job is done.”

What particularly worries Powell and other Fed officials is the prospect that inflation would become entrenched, leading consumers and businesses to change their behavior in ways that would perpetuate higher prices. If, for example, workers began demanding higher pay to match higher inflation, many employers would then pass on those higher labor costs to consumers in the form of higher prices.

Many analysts speculate that Fed officials want to see roughly six months or so of lower monthly inflation readings, similar to July’s, before stopping their rate hikes.