Powell also warned more bluntly than in the past that the Fed’s continued tightening of credit will cause pain to many households and businesses as higher interest rates further slow the economy and potentially lead to job losses. “That’s the unfortunate cost of deflation,” he said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole, Wyo. “But a failure to restore price stability would mean much more pain.” Investors were hoping for a signal that the Fed could moderate its rate hikes later this year if inflation showed further signs of easing. But the Fed chair indicated that that time may not be near. “I’m not surprised by anything he had to say,” said David Baskin, founder of Baskin Wealth Management in Toronto. “The biggest fear that central bankers have is that inflation will get away from them, and by that I mean that everyone will expect inflation to stay high.” The Fed is trying to manage expectations and concerns about inflation, as workers and unions seek potentially higher raises and suppliers raise prices in anticipation of rising product costs, Baskin added. “What central bankers really need to do is to break the cycle of expectations and get people to believe that inflation is going to come down and come down quite quickly. And their tool to do that, of course, is to raise interest rates.”
Fed may slow pace of rate hikes ‘at some point’
After raising its key short-term rate by three-quarters of a point at each of its last two meetings – part of the Fed’s fastest rate hike streak since the early 1980s – Powell said the Fed could relax this rate “sometime” — suggesting that any such slowdown is not imminent. Powell said the size of the Fed’s rate hike at its next meeting in late September – either half or three-quarters of a percentage point – would depend on inflation and jobs data. An increase of any size, however, would exceed the Fed’s traditional quarterly hike, a reflection of how severe inflation has become. Sal Guatieri, senior economist at BMO, wrote that economists will look for a 50 basis point hike, with rates peaking between 3.50 percent and 3.75 percent, when the next rate hike is announced on Sept. 21 . Such a move “should be “sufficiently restrictive” to reduce demand and gradually reduce inflation without driving the economy into a deep recession,” Guatieri wrote. WATCHES | Federal Reserve rate hikes will affect Canadians too:
The US central bank wants to curb inflation
CBC News senior business correspondent Peter Armstrong breaks down what the U.S. central bank’s rate hike means for the economy and what it could mean for Canadians dealing with inflation squeezing their budgets While the lower inflation readings reported for July were “welcome,” the Fed chairman said, “one month’s improvement falls well short of what the Committee will need to see before we can be confident that inflation is moving lower.” . Powell noted that the history of high inflation in the 1970s, when the central bank tried to deal with high prices only with intermittent rate hikes, shows that the Fed needs to stay focused. “The historical record strongly warns against premature” interest rate cuts, he said. “We must maintain it until the job is done.” Powell’s speech is the opening act of the Fed’s annual economic symposium in Jackson Hole, the first time the central bankers’ conference has been held in person since 2019, as it went virtual for two years during the COVID-19 pandemic. Since March, the Fed has implemented its fastest pace of rate hikes in decades to try to curb inflation, which has punished households with rising costs for food, gas, rent and other necessities. The central bank raised its benchmark interest rate by two full percentage points in just four meetings, to a range of 2.25 percent to 2.5 percent. These increases have led to higher costs for mortgages, auto loans and other consumer and business borrowing. Home sales have been plunging since the Fed first indicated it would raise borrowing costs.
Slowing down the economy without causing a recession
In June, Fed policymakers signaled that they expected to end 2022 with their key interest rate in a range of 3.25% to 3.5% and then raise it further next year to between 3.75% and 4 %. If interest rates reach projected levels at the end of this year, they will be at their highest since 2008. Powell is betting that it can create a high-risk effect: slowing the economy enough to reduce inflationary pressures, but not so much as to cause a recession. WATCHES | US interest rates will affect Canadians too:
What the Fed rate hike means for inflation
CBC senior business correspondent Peter Armstrong helps make sense of the Federal Reserve’s rate hike — and what it might signal for the Canadian economy. The Fed chairwoman’s task is complicated by a murky picture of the US economy: On Thursday, the US government said its economy shrank at an annual rate of 0.6% between April and June, the second straight quarter of contraction. But employers are still hiring quickly and the number of people filing for unemployment benefits — a measure of layoffs — remains relatively low. At the same time, inflation remains overwhelmingly high, although it has shown some signs of easing, notably in the form of lower gas prices. At its July meeting, Fed policymakers voiced two competing concerns that underscored their delicate task. According to the minutes from that meeting, the officials – who are not identified by name – have prioritized fighting inflation. But some officials said there was a risk the Fed could raise borrowing costs more than necessary, risking a recession. If inflation fell closer to the Fed’s two percent target and the economy weakened further, these divergent views would be difficult to reconcile. At last year’s Jackson Hole Symposium, Powell listed five reasons why he believed inflation would be “transient.” However, he has persisted instead, and many economists have noted that these remarks have not aged well. Powell implicitly acknowledged that history at the start of his remarks on Friday when he said that “in past Jackson Hole conferences, I have discussed big issues like the ever-changing structure of the economy and the challenges of conducting monetary policy.” “Today,” he said, “my remarks will be shorter, my focus narrower and my message more direct.”
