The chairman of the Fed is promising strong actions to slow the rate of inflation.
Key details
Federal Reserve Chairman Jerome Powell’s opening remarks to the Jackson Hole conference suggest that the Fed will be taking decisive action in September to curb inflation rates. Powell did not affirm how high-interest rates will hike but said that the committee will make their decision based on the state of the economy next month.
“Today my remarks will be shorter, my focus narrower, and my message more direct. The Federal Open Market Committee’s overarching focus right now is to bring inflation back down to our 2% goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy,” says Powell.
“While the lower inflation readings for July are certainly welcome, a single month’s improvement falls short of what the committee will need to see before we’re confident inflation is moving down. So we are moving our policy stance purposely to a level that will be sufficiently restrictive to return inflation to 2%.”
Why it’s important
A restrictive approach to monetary policy is going to have a negative effect on the economy, and will likely bolster a short recession within the next 12 to 18 months.
Powell suggests that the Fed will need to maintain a restrictive policy stance for an extended period of time in order to reduce inflation, and acknowledged that the burdens that will come with it will fall “most heavily on those least able to bear it”. The decision is likely to stifle economic growth and soften labor market conditions at the cost of households and businesses.
He did affirm though that restoring price stability is a necessity to avoid a “far greater pain”.
Notable quote
“The successful Volcker disinflation of the 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of restrictive monetary policy was ultimately needed to stem high inflation and to start the process of getting inflation down to low and stable levels that were the norm until the spring of last year,” says Powell.
Backing up a bit
Jackson Hole is an annual symposium hosted by the Kansas City Federal Reserve in Jackson Hole, Wyoming that plays host to central banking chairs from around the world, and is used for making major policy announcements. Today’s opening remarks by Powell have been highly anticipated as they set the tone for what the Fed is planning to do in September when it announces another rate hike.
As we previously reported, Fed officials are sending mixed signals about their upcoming hike in interest rates, following two consecutive months of 75-basis-point hikes in June and July. The Fed has been raising interest rates to slow the rate of spending, and to reduce the inflation rate that spiked in June at 9.1%. It may back off from another 75-basis-point hike in response to two months of improvement, which may reduce the possibility of an upcoming recession. A reduced hike of 50-basis-points could lower the economic impact.
The Dow spiked 300 points yesterday in anticipation of the speech, according to CNBC.