The Federal Reserve will continue to increase interest rates, holding inflation’s foot to the fire until inflation is under control, even if unemployment rises.
“We will keep at it until we are confident the job is done,” Jerome Powell, the Fed chairperson, said during the Jackson Hole, Wyoming symposium of central bankers and academics.
Powell’s Friday remarks collided with some investors’ expectations that the Fed might retreat from its growth restraining trajectory.
While the increases will bring down inflation, Powell noted, “they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
Powell’s remarks left no questions; the tightening would continue. It crushed the idea that Americans would soon view the Fed’s restrictive trajectory in the rearview mirror.
Consequently, the chairperson’s remarks sent the stock market into a steep decline. By the closing bell, the Dow Jones had dropped 1,000 points, extinguishing gains. The Wall Street Journal reported all 11 sectors of the S&P 500 plummeted 141-points, while fewer than 10 stocks traded in a positive range as the clock neared 3 p.m. The NASDAQ was no different, nosediving almost 500 points.
During their last two meetings, the Fed raised the benchmark federal fund rates by 0.75 percentage points. In July, the range sat between 2.25% and 2.5%. The current stride illustrates the fastest increase in short-term interest rates since the central bank began using the fed-funds rate as its goal in the early 1990s.
Powell said the economy “continues to show strong underlying momentum,” regardless of mixed growth signals. However, he indicated that one month of inflation’s improvement “falls far short” of what the Fed “will need to see before we are confident that inflation is moving down.”
“The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers,” Powell said. The Wall Street Journal reported that the labor market job gains are robust. In addition, July’s unemployment rate stands at a 50-year low.
Powell highlighted the central bank’s shift from rapid, large rate increases to a new one that continues to raise rates, but focuses on a level that slows the economy, then holds that level for some time.
“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%,” Powell said. Bringing inflation down was likely to “require maintaining a restrictive policy stance for some time.”
Pointing to the on-again, off-again rate increases of the 1970s, Powell said, “The historical record cautions strongly against prematurely loosening policy.”