In a much-anticipated speech at the first in-person meeting of global central bankers since the start of the coronavirus pandemic, the Fed chairman said falling inflation would likely lead to “a sustained period of below-trend growth” and predicted there would be “much there is likely to be some softening of labor market conditions.” “That’s the unfortunate cost of reducing inflation,” Powell said as he predicted “some pain” for households and businesses, adding: “But a failure to restore price stability would mean a lot more pain.” The remarks were intended to dispel doubts about the Fed’s determination to keep pushing the US economy to root out inflation after it began its most aggressive monetary policy tightening since 1981. The US stock market weakened after Powell’s remarks, with the benchmark S&P 500 down 1.7% and the tech-heavy Nasdaq Composite down 2%. US Treasury yields rose. On the politically sensitive two-year Treasury note, the yield rose 0.05 percentage points to 3.42%. The yield on the 10-year note — which moves with expectations for growth and inflation — rose 0.02 percentage points to 3.04 percent. Yields rise when a bond’s price falls. “We are taking strong and swift steps to moderate demand to better align with supply and keep inflation expectations steady,” Powell said. Powell’s speech was in stark contrast to the message he gave at last year’s symposium, when he predicted that rising consumer prices were a “transient” phenomenon stemming from supply chain issues. It has since become clear that inflation is driven by demand and is therefore likely to be sustained for a longer period of time. Fed headquarters reverted to the lessons of the 1970s, when the US central bank presided over a period of turmoil after making several policy blunders and failing to contain inflation. This forced Paul Volcker, who became Fed chairman in August 1979, to throttle the economy and cause more pain than would have been necessary if officials had acted more quickly. “The historical record strongly warns against premature policy easing,” Powell said as he explained that interest rates should remain at a growth-restricting level “for some time.” The main lesson of that period was that “central banks can and must take responsibility for achieving low and stable inflation,” he said, reiterating the Fed’s “unconditional” commitment to tackling rising prices. It also highlighted the danger of inflation remaining too high for too long, setting off a chain reaction in which people expect further price rises. “The longer the current period of high inflation continues, the greater the likelihood that expectations of higher inflation will be entrenched,” Powell warned. Financial markets had rallied in recent weeks amid expectations that the Fed could ease its efforts to curb demand as incoming economic data worsened further and concerns grew about risks being too heavy. Last month, the central bank raised interest rates for the second time in a row by 0.75 percentage points, bringing the federal funds rate to a new target range of 2.25% to 2.50%. Fed officials are debating whether a third hike of the same size will be needed at its September meeting, or whether they should opt for a half-point increase. Powell’s comments prompted investors to shift bets on how policymakers will eventually raise interest rates. Futures markets on Friday suggested the Fed would raise the federal funds rate to 3.83% by next March. Futures markets also suggested that traders accept that the central bank could keep that rate higher for longer. It marked a notable departure as investors were reluctant to bet that the Fed would be committed to keeping interest rates high in the face of an economic slowdown. Powell said that at some point it would be appropriate to slow the pace of rate hikes. However, he dismissed recent data showing a slight easing in inflation as insufficient, adding: “One month’s improvement falls well short of what the committee will need to see before we can be confident that inflation is moving down.” Most officials argue that they can bring inflation under control without triggering a painful recession. That contrasts with the consensus view among Wall Street economists, who are predicting at least a mild recession sometime next year. Economists also expect the U.S. jobless rate to rise beyond the 4.1 percent generally expected by FOMC members and regional bank presidents in June. The unemployment rate, today’s bright spot in the US economy, is at a multi-decade low of 3.5%.
