Federal Reserve Chairman Jerome Powell in an appearance on Thursday stressed the importance of bringing inflation down now before the public gets too used to higher prices and comes to expect them like the standard.
In his final comments outlining his commitment to fighting inflation, Powell said expectations played an important role and were key to explaining why inflation was so persistent in the 1970s and 1980s.
“History strongly warns against premature policy easing,” the central bank chief said in a Q&A presented by the Cato Institute, a Washington, D.C.-based libertarian think tank. “I can assure you that my colleagues and I are strongly committed to this project and we will continue until the job is done.”
The event was Powell’s last planned public appearance before the Fed’s next meeting on September 20-21.
Markets largely accepted the comments, with significant averages little changed at first on Wall Street. Treasury yields were mostly higher, with the two-year note, the most sensitive to Fed rate hikes, rising nearly 5 basis points to 3.49%. One basis point is 0.01 percentage point.
The Fed has raised benchmark interest rates four times this year, with the fed funds rate now set in a range between 2.25% and 2.50%.
Markets generally expect the Federal Open Market Committee responsible for setting rates to pass a third consecutive 0.75 percentage point hike when it meets later this month. In fact, that probability jumped to 86% during Powell’s remarks, according to CME Group’s FedWatch tracker on fed funds futures betting. Both Goldman Sachs and Bank of America told their clients to expect a three-quarter point hike.
One reason to act aggressively is to make sure inflation hovering around its highest rate in more than 40 years doesn’t take root in the public consciousness, Powell said.
“The Fed has a responsibility for price stability, which is 2% inflation over time,” he said. “The longer inflation remains above target, the greater the risk that the public will begin to see higher inflation as the norm, and this has the ability to increase the costs of reducing inflation. .”
There have been recent signs that at least the monthly path of inflation is softening. In particular, gasoline prices continued to fall after briefly rising above $5 a gallon earlier in the summer.
The Fed will get its final look at inflation data before next week’s meeting, when the Bureau of Labor Statistics releases August consumer price index data. Economists expect the CPI to rise 0.2% overall after it was flat in July, according to FactSet. However, from year to year the increase in July was 8.5%and many areas outside of energy saw significant increases.
Powell said inflationary pressures came largely from pandemic-specific causes. When inflation started to rise in the spring of 2021, Powell and his colleagues called it “transitional” and did not respond with any major policy action before starting to raise rates in March 2022.
However, he said it is now up to the Fed to keep acting until inflation comes down and avoid the consequences of the 1970s, when a failure to implement an aggressive policy response allowed public expectations of high inflation to escalate.
“We must act now, frankly, strongly, as we have been, and we must continue until the work is done to avoid this,” he said.
Powell noted the strength of the labor market, with strong levels of hiring persisting even with rate hikes and as Fed officials expect the official unemployment rate to rise. He warned last month that the economy could suffer “some difficulties” due to tighter policy, but said slower growth was needed to bring inflation under control.
“What we hope to achieve is a period of below-trend growth that will bring the labor market back into better balance and bring wages back to levels more consistent with 2% inflation over time.” , did he declare.