(Washington) Fighting inflation in the United States “will hurt American households and businesses,” but not doing so would hurt the economy even more, Federal Reserve Board (Fed) Governor Jerome Powell warned on Friday.
Posted at 10:05 am
Updated at 12:41 p.m
In a remark of rare frankness, made at the Jackson Hole, Wyoming, central bankers’ conference, the Fed President warned that the US Federal Reserve would “use its tools vigorously” by raising interest rates.
The return to price stability “will take time” and result in “a long period of lower growth” and “a slowdown in the labor market,” he said months ahead of midterm elections for the Democratic government of Joe Biden.
Inflation in the United States rose to 8.5% year-on-year in July, up from 9.1% in June, a 40-year high, according to the CPI consumer price index. According to another indicator closely watched by the Fed, the PCE index, released on Friday, it came in at 6.3% versus 6.8% over a year.
President Joe Biden welcomed this monthly drop in inflation, and in a press release ensured that Americans were starting to feel “relief” thanks to “gasoline prices falling every day this summer.” But “we still have a lot to do,” he added.
For Mr Powell, “while these recent declines in July are welcome, an improvement in just one month is far from sufficient” and needs to be confirmed.
The Fed wants to bring price inflation back to around 2%, and that policy will “have a number of ‘unfortunate costs’,” he lamented.
He reiterated that the Fed was poised for “another exceptionally large rate hike” at the next Monetary Committee meeting on Sept. 21, having already tightened twice in a row by 75 basis points each.
The Fed warned markets that interest rates would go into “restrictive” territory, ie slowing down the economy.
He also pointed out that the bar of the neutral interest rate, which reflects the ideal level of interest rates, which is generally estimated at around 2.5% to neither create overheating nor cool down the economy, is currently hardly relevant.
Mr Powell acknowledged “that at some point it will be appropriate to slow the pace of rate hikes,” but he added a caveat to the notion that financial markets had recently been hailing.
“History shows that we have to be careful not to ease monetary policy too early,” he warned in this message, which he wanted “directly.”
As every year, but this time even more so, the speech by the head of the most powerful central bank was the focus of the symposium in Jackson Hole, for the first time since 2019 face to face.
Mr Powell acknowledged that “the current inflation is a global phenomenon and many economies around the world are facing price increases equal to or greater than those in the United States”.
Since the spring, to cool off overheated prices, the Federal Reserve has pushed the federal funds rate, which affects all other lending, from zero to a range between 2.25% and 2.50%.
Mr Powell cited several times in his statement a famous predecessor at the Fed, Paul Volcker, who is credited with managing to stem runaway inflation in the early 1980s.
“It was a + hawk + speech,” summed up Paul Ashworth, economist for capital economics, referring to the clan of supporters of a tight monetary policy, in the language of central bankers, who, in contrast to the “doves”, are first banking on inflation. , more concerned about the unemployment rate.
“Not a crumb for the pigeons! added Ian Shepherdson of Pantheon Macroeconomics.
On the markets, the dollar, which was initially significantly weaker after the intervention of the head of the Fed, stabilized at around 12:15 p.m. exactly against the euro at 1 dollar for 1 euro (+0.22% against the euro).
On Wall Street, the three indices suffered the setback before the Fed’s firm tone, the idea of more expensive money costs with rising interest rates weighed on the financing and earnings prospects of companies in the technology sector in particular.
The Dow Jones Index fell 1.84%, the tech-dominated NASDAQ 2.83% and the S&P 500 2.15%.