The chairman of the Federal Reserve, Jerome Powell said on Friday that the job of lowering inflation is not done, and we will keep at it until we are confident the job is done. Powell was speaking at the Fed's annual conference in Jackson Hole, Wyoming, an event closely followed by markets and pundits, trying to anticipate future actions.
Inflation data on Friday showed prices in the US increased 6,3% in the last twelve months to July, which is down from the 6,8% from June. When taking out food and energy, the Personal Consumption Expenditures Index rose 4,6% compared to July 2021, which is still above the Fed's target of 2%.
While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” Powell insisted.
The Fed has delivered four consecutive interest rate hikes over the last six months, moving in June and July to raise rates by 0.75%, the largest moves since 1994.
By raising borrowing costs, the Fed hopes to dampen demand, and contain inflation, by making home buying, business loans, and other types of credit more expensive.
Short-term interest rates are now in a target range between 2.25% and 2.5%, which some Fed policymakers consider to be the so-called neutral rate,” or the level rates that is neither stimulative nor restrictive to economic activity.
Powell said more rate hikes will be needed, with “another unusually large” increase still on the table for the Fed’s next meeting in September. The Fed chair reiterated that “at some point,” the Fed will move to slow the pace of its price increases.
“In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause,” Powell said on Friday.
With US unemployment at a historically low 3,5% in July, Powell said the labor market remains strong but suggested that the Fed’s campaign to hike rates could restrict economic activity and lead to a “softer” labor market. Fed’s next policy-setting meeting is scheduled September 20 and 21.
Combined with the crunch of expensive credit, Powell warned households and businesses may feel some pain as interest rates increases continue.
Likewise markets reacted negatively to Powell's tough stance on fighting inflation: the Dow Jones Industrial Average dropped 1,008.38 points, or 3.03%, to 32,283.40, with losses accelerating into the close. The S&P 500 fell 3.37% to 4,057.66, and the Nasdaq Composite slid 3.94% to 12,141.71.