Federal Reserve Chairman Jerome Powell, speaking on Thursday, stressed the importance of reducing inflation now, before the public gets too used to higher prices and expects them as the norm.
In his latest comments, underscoring his commitment to fighting inflation, Powell said expectations played an important role and were a critical reason why inflation was so persistent in the 1970s and 1980s.
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“History strongly cautions against premature policy easing,” the central bank leader said in a Q&A presented by the Cato Institute, a libertarian think tank based in Washington, DC. “I can assure you that my colleagues and I are very committed to this project and will continue until the job is done.”
The event was Powell’s last scheduled public appearance before the Fed’s next meeting on September 20-21.
Markets largely took the comments in stride, with major averages little changed in early Wall Street. Treasury yields were mostly higher, with the two-year note, the most sensitive to a Fed rate hike, rising nearly five basis points to 3.49%. A basis point equals 0.01 percentage point.
The Federal Reserve has raised benchmark interest rates four times this year, with the fed funds rate now set in a range between 2.25%-2.50%.
Markets widely expect the rate-setting Federal Open Market Committee to implement a third straight hike of 0.75 percentage points this month. In fact, that probability rose to 86% during Powell’s remarks, according to CME Group’s FedWatch tracker of federal funds futures bets. Both Goldman Sachs and Bank of America told clients to expect that three-quarter point increase.
One reason we are acting aggressively is to make sure that inflation, which is hovering around its highest rate in more than 40 years, does not take root in the public consciousness, Powell said.
“The Fed is responsible for price stability, by which we mean 2% inflation over time,” he said. “The longer inflation remains well above target, the greater the risk that the public will come to see higher inflation as the norm, and this has the capacity to raise the cost of deflation.”
There are recent signs that at least the monthly trend in inflation is easing. In particular, gasoline prices have been falling steadily after briefly rising above $5 a gallon earlier in the summer.
The Federal Reserve gets one last look at inflation data ahead of next week’s meeting when the Bureau of Labor Statistics releases August consumer price index data. Economists expected a core 0.2 percent increase in the consumer price index after it was flat in July, according to FactSet. However, the year-on-year increase in July was 8.5%, and many areas outside of energy saw significant increases.
Powell said inflationary pressures came largely from pandemic-specific reasons. When inflation first started to rise in the spring of 2021, Powell and his colleagues dismissed it as “transitional” and did not respond with any major policy moves before starting to raise rates in March 2022.
However, he said it was now incumbent on the Fed to continue acting until inflation fell and avoid the consequences of the 1970s, when the failure to implement an aggressive policy response allowed public expectations of high inflation to build.
“We must act now, decisively, decisively as before, and we must continue until the job is done to avoid this,” he said.
Powell noted the strong labor market, with steady hiring levels holding up despite rate hikes, even as Fed officials expect the official unemployment rate to rise. He warned last month that the economy could experience “some pain” from tighter policies, but said the slowdown in growth was necessary to tame inflation.
“What we hope to achieve is a period of below-trend growth that will push the labor market back into better balance and that will bring wages back to levels that are more consistent with 2% inflation over time.” of the weather,” he said.