US Federal Reserve Chairman Jerome Powell delivered a tough message on Friday: The Fed is likely to impose more interest rate hikes in the coming months and is firmly focused on taming the highest inflation in four decades.
Powell also warned more explicitly than in the past that the Fed’s continued tightening of credit will cause pain to many households and businesses, as its higher rates further slow the economy and could lead to job losses. work
“These are the unfortunate costs of reducing inflation,” he said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole, Wyo. “But a failure to restore price stability would mean much greater pain.”
Investors were waiting for a sign that the Fed might moderate its rate hikes later this year if inflation showed more signs of easing. But the Fed chair indicated that that time may not be near.
“I’m not surprised by anything he had to say,” said David Baskin, founder of Baskin Wealth Management in Toronto. “The biggest fear that central bankers have is that inflation will get away from them, and by that I mean that everyone expects inflation to stay high.”
Stocks fell after Powell’s speech on Friday as investors mulled the prospect of higher borrowing costs for some time.
The Dow Jones Industrial Average was down 1,008 points, or 3 percent, in late trading, while the technology-focused Nasdaq was down even more, nearly 4 percent.
The benchmark Toronto Stock Exchange fared comparatively better at 299 points, down just under 1.5 per cent.
“I think the market was expecting something a little bit more … soft, saying that, you know, ‘we don’t want to raise interest rates too fast and scare everybody,'” Baskin added.
The Fed is trying to manage expectations and concerns about inflation, such as workers and unions potentially seeking higher raises and suppliers raising prices in anticipation of rising product costs, he said.
“What central banks really need to do is break the cycle of expectations and get people to believe that inflation is going to come down and come down quite quickly. And their tool to do that, of course, is to raise interest rates interest”.
Fed may slow pace of rate hikes ‘at some point’
After raising its key short-term rate by three-quarters of a point at each of its last two meetings, part of the Fed’s fastest run of rate hikes since the early 1980s, Powell said that the Fed could ease that pace “at some point.” ” — suggesting that any such slowdown is not imminent.
Powell said the size of the Fed’s rate hike at its next meeting in late September, whether it be half or three-quarters of a percentage point, will depend on inflation and jobs data. However, an increase of any size would exceed the Fed’s traditional quarter point hike, a reflection of how severe inflation has become.
BMO senior economist Sal Guatieri wrote that economists will look for a 50 basis point hike, with rates peaking between 3.50% and 3.75%, when the next rate hike is announced on the 21 of September
That move “must be ‘tight enough’ to cool demand and gradually reduce inflation without plunging the economy into a deep recession,” Guatieri wrote.
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While the lower inflation readings reported for July were “welcome,” the Fed chairman said, “the one-month improvement is well below what the Committee will need to see before you trust that inflation is coming down.”
Powell noted that the history of high inflation in the 1970s, when the central bank tried to counter high prices with only intermittent rate hikes, shows the Fed needs to stay focused.
“The historical record strongly cautions against premature lowering” of interest rates, he said. “We must continue until the job is done.”
Powell’s speech is the main event at the Fed’s annual economic symposium in Jackson Hole, the first time the central bankers’ conference has been held in person since 2019, having gone virtual for two years during the pandemic. the COVID-19.
Since March, the Fed has implemented its fastest pace of rate hikes in decades to try to curb inflation, which has punished households with rising costs for food, gas, rent and other necessities. The central bank has lifted its benchmark rate by a full two percentage points in just four meetings, to a range of 2.25% to 2.5%.
These hikes have led to higher costs for mortgages, car loans and other consumer and business loans. Home sales have fallen since the Fed first signaled it would raise borrowing costs.
Slow the economy without causing a recession
In June, Fed policymakers noted that they expected to end 2022 with their key rate in a range of 3.25% to 3.5%, then raise it further next year to between 3.75% and 4%. If rates reach forecast levels later this year, they would be at their highest point since 2008.
Powell is betting he can engineer a high-stakes outcome: slow the economy enough to ease inflationary pressures, but not enough to trigger a recession.
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The Fed chairman’s task has been complicated by the gloomy picture of the US economy: on Thursday, the US government said that its economy contracted at an annual rate of 0.6 per cent in the period between April and June, the second consecutive quarter of contraction. However, employers continue to hire quickly and the number of people filing for unemployment benefits, a measure of layoffs, remains relatively low.
At the same time, inflation remains overwhelmingly high, although it has shown some signs of easing, notably in the form of falling gas prices.
At the July meeting, Fed policymakers expressed two opposing concerns that highlighted their delicate task.
According to the minutes of this meeting, the officials, who are not identified by name, have prioritized their fight against inflation. Still, some officials said there was a risk the Fed would raise borrowing costs more than necessary, risking a recession. If inflation fell closer to the Fed’s two percent target and the economy weakened further, these divergent views could be difficult to reconcile.