Rates will go up until the ‘job is done’ bringing down inflation

Rates will go up until the ‘job is done’ bringing down inflation

Federal Reserve Chair Jerome Powell said Friday that the central bank’s work on reducing inflation is not complete, suggesting the Fed will continue to aggressively raise interest rates to cool the economy.

“We will continue 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, the single-month improvement falls far short of what the Committee will need to see before we can be confident that inflation is falling,” Powell said on Friday.

Friday morning inflation data showed prices in the United States rose 6.3% year-on-year in July, down from the 6.8% pace measured in June. Excluding food and energy, the Personal Consumption Expenditure Index showed prices rose 4.6% from a year earlier – still well above the Fed’s 2% target.

The central bank has made four consecutive interest rate hikes in the past six months, moving in June and July to raise rates by 0.75%, the Fed’s biggest moves since 1994. expensive.

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

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

“Under the current circumstances, with inflation well above 2 percent and the job market extremely tight, long-term neutral estimates are not a place to stop or pause,” Powell said on Friday.

The Fed chairman said central banks need to act quickly, warning that historic episodes of inflation have shown that delayed reactions by central banks tend to come with steeper job losses.

“Our goal is to avoid this outcome by acting decisively now,” Powell said.

US Federal Reserve Chairman Jerome Powell attends a press conference in Washington, DC, United States, July 27, 2022. The US Federal Reserve on Wednesday raised its benchmark interest rate by 75 points. base, the second in a row of this magnitude, as high inflation showed no clear signs of easing.  (Photo by Liu Jie/Xinhua via Getty Images)

US Federal Reserve Chairman Jerome Powell attends a press conference in Washington, DC, United States, 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 remained strong, but suggested the Fed’s campaign to raise rates could constrain economic activity and lead to a labor market.” Softer”.

Combined with the expensive credit crunch, Powell warned that households and businesses could feel some pain as interest rate hikes continue.

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

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

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

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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