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Powell - "Pain" Ahead

FILE: Federal Reserve Chairman Jerome Powell speaks during a news conference at the Federal Reserve Board building in Washington. Taken 7.27.2022

Taming US inflation will inflict "pain" on American families and businesses, but failure to wrestle prices down from their current 40-year high would be even more harmful, Federal Reserve Chair Jerome Powell said Friday in a hotly-anticipated speech to global policymakers.

Fed Chair Jerome Powell warned Friday that the world's largest economy is likely to slow for a sustained period, and the strong US job market will suffer in order to get prices down -- consequences he called the "unfortunate costs of reducing inflation."

Addressing the annual gathering of central bankers in Jackson Hole, Wyoming, Powell did not hold back or leave room for doubt about the Fed's plans, pledging to act "forcefully."

"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance," he told the gathering, held against the backdrop of the majestic Grand Teton mountains.

"While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," Powell said.

"But a failure to restore price stability would mean far greater pain."

The Fed this year launched an aggressive campaign to raise interest rates -- and in his unusually short, notably direct remarks, Powell made it clear that the fight against inflation is not over.

But Powell doused those hopes, making it clear that Fed policy and the benchmark borrowing rate would have to remain "sufficiently restrictive" to bring inflation back down to the two percent target.

In the battle to contain red-hot US inflation, which topped nine percent in June, the Fed has increased rates four times, including three-quarter-point increases in June and July -- steep moves unheard of since the early 1980s -- to the current level of a range of 2.25 to 2.5 percent.

Powell repeated Friday that another giant 75 basis point hike could be appropriate at the September policy meeting.

But recent data has shown signs of a slowing in price increases. Annual consumer price inflation dipped to a still-high 8.5 percent in July.

And data released Friday showed the Fed's preferred inflation measure, the personal consumption expenditures price index, actually fell 0.1 percent in July -- a dramatic slowdown from the 1.0 percent surge in June, largely reflecting the recent sharp retreat in global oil prices.

Over the last 12 months, the PCE price index slowed to 6.3 percent, the Commerce Department reported.

But Powell did not take much comfort in the figures.

"While the lower inflation readings for July are welcome, a single month's improvement falls far short of what (policymakers) will need to see before we are confident that inflation is moving down," he said.

But President Joe Biden cheered the figures, saying, "The American people are starting to get some relief from high prices."

Still, he added, "We have more work to do. We have to help families who have been squeezed by decades living paycheck to paycheck."

Powell pointed to the experience of one of his predecessors, famed inflation dragon slayer Paul Volcker -- who used aggressive measures to quell runaway prices -- and said officials cannot retreat from their responsibility.

"That means the Fed must hammer demand to come in line with what is becoming a global economy of scarcities or constrained supply," KPMG economist Diane Swonk said on Twitter.