Powell Says Fed’s Inflation Fight Will ‘Bring Some Pain’

Powell Says Fed’s Inflation Fight Will ‘Bring Some Pain’

Federal Reserve Chair Jerome Powell said Friday that the central bank intends to continue its aggressive battle against inflation and warned that the interest rate hikes intended to bring inflation back toward a 2% target rate will result in “slower growth and softer labor market conditions” that will “bring some pain to households and businesses.”

In comments delivered at the Federal Reserve Bank of Kansas City’s annual economic policy symposium in Jackson Hole, Wyoming, Powell made it clear that the battle against inflation is not over, and that the Fed will use its tools “forcefully” as it tightens the flow of money through the economy. “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 must keep at it until the job is done,” Powell added.

Another Volcker recession? In his brief, eight-minute statement — Powell said “my remarks will be shorter, my focus narrower, and my message more direct” — the Fed chief explicitly cited Paul Volcker, the former Fed chief who famously jacked up interest rates and pushed the economy into recession in the early 1980s during a period of stagflation.

Powell said one lesson learned from the Volcker years was that the Fed needs to act quickly and maintain its anti-inflationary efforts until the problem is eliminated. That didn’t happen in the 1970s, Powell said, and inflation grew out of control. “A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year,” he said. “Our aim is to avoid that outcome by acting with resolve now.”

Although Powell said he was hoping to avoid the severe harsh course of action taken by Volcker, some observers thought the overall tone of his comments was severe, with strong hints that a Fed-induced recession is likely in the coming months.

Greg Ip of The Wall Street Journal noted that Powell said the Fed would “keep at it” until the job was done — and that Volcker’s autobiography was titled, “Keeping at It.” Ip told CNN that Powell’s comments were “as close as you'll ever hear a Fed chairman say get ready for a recession.”

Michael Feroli of J.P.Morgan said the Fed chair’s comments were “brief and hawkish” and “appeared to push back against the idea that the Fed would be easing policy next year.”

Investors on Wall Street appeared to agree that Powell was sending a very hawkish message, with the S&P 500 index losing over 3.3% by the end of trading.

Not everyone was so gloomy, though. Analysts at Goldman Sachs said they are sticking with their forecast of smaller rate hikes by the Fed in the coming months. “We continue to expect the [Fed Open Market Committee] to slow the pace from here, delivering a 50 [basis point] hike in September and 25 [basis point] hikes in November and December, for a terminal rate of 3.25-3.5%.”

Still, they noted that there was a risk that the Fed would impose another 75-basis-point hike in September, and the risks for interest rates are now “tilted to the upside.”