The Federal Reserve Chair, Jerome Powell seriously warned of the dangers of an economic recession due to a high inflation rate.
The message had a negative impact on Wall Street and the Dow Jones Industrial Average dropped by 1,000 points.
According to Powell, the costs of reducing inflation are unfortunate. However, failing to do so would mean much greater pain to a country.
Investors had been hoping that the Fed will stop raising interest rates if inflation shows signs it’s slowing. Powell signaled that the time isn’t yet near, and stocks tumbled in response.
Runaway prices have caused the American people to think poorly of the economy even though unemployment has fallen to a half-century low of 3.5%. Increased prices have brought up political risks for Joe Biden and Congressional Democrats in this month’s election, with Republicans denouncing his $1.9 trillion financial support package as having fueled inflation.
The tech-heavy stock averages had its worst day in 3 months, ending down 3%. The Dow Jones average finished down 3% on Friday. Shorter term Treasury yields rose as traders built up bets for the Fed to stay aggressive with rates.
Wall Street predicts that the economy is going to enter a recession later this year or early next year. They believe the Fed is going to reverse its decision and lower interest rates.
Fed officials have pushed back against the idea of a slower-growing economy to combat high inflation, but Powell seems open to shifting rates in that direction.
According to economist Eric Winograd, the decision the Fed made is to be tight even when it hurts, which contradicts the opinion of some experts in the field.
Powell indicated that they will loosen up on the pace of inflationary hikes in the future, but not yet.
Powell said the size of the rate increase would depend on current inflation and jobs data, but that they will probably be greater than a quarter point.
The Fed chair said that while lower inflation readings that have been reported for July have been “welcome,” he added that, “a single month’s improvement falls far short of what (Fed policymakers) will need to see before we are confident that inflation is moving down.”
In June, prices increased 6.8% from 12 months prior to July. However, the increase was largely because of high gas prices in June, which decreased in July. Prices dropped 0.1% in July from the previous month and there were no inflationary increases since then.
Powell noted that intermittent rate hikes are like the Fed’s attempt to get inflation back down in the 1970s which didn’t work. In order for these policies to be successful, the Fed must stay focused.
“The historical record cautions strongly against prematurely” lowering interest rates, he said. “We must keep at it until the job is done.”
What particularly worries Powell and other Fed officials is the prospect that inflation would become entrenched, leading consumers and businesses to change their behavior in ways that would perpetuate higher prices. If, for example, workers began demanding higher pay to match higher inflation, many employers would then pass on those higher labor costs to consumers in the form of higher prices.
Many analysts speculate that Fed officials want to see roughly six months or so of lower monthly inflation readings, similar to July’s, before stopping their rate hikes.
Powell’s speech was the marquee event of the the Fed’s annual economic symposium at Jackson Hole, the first time the conference of central bankers is being held in person since 2019, after it went virtual for two years during the COVID-19 pandemic.
The Fed has been implementing raising rates to curb inflation as of March 2018. The Federal Reserve’s benchmark rate was 2% as of late September, with a goal of achieving 2.5%.
The increase of mortgages, car loans and other borrowing has led to a surge in the cost. The rise of rates has also had an effect on home sales, which are down from when the U.S Federal Reserve first signaled that it would raise borrowing costs.
The Fed’s beginning interest rate by the end of 2022 will be at the highest point since 2008, with a projected range of 3.25%-3.5%. This forecast is being predicted due to expectations of between 3.75% and 4%, which will happen later this year if they are reached.
With a retooled policy, Powell is betting that he can engineer an outcome to ease inflation pressures without triggering a recession.
His task has been complicated by the economy’s cloudy picture: On Thursday, the government said the economy shrank at a 0.6% annual rate in the April-June period, the second straight quarter of contraction. Yet employers are still hiring rapidly, and the number of people seeking unemployment aid, a measure of layoffs, remains relatively low.
At their July meeting, Fed policymakers talked about two competing concerns that highlighted the difficulty of their role.
The officials at this meeting, which weren’t identified, want to be sure they’re following the Fed’s mandate on inflation. They acknowledged there is a risk that the Fed could raise borrowing costs more than necessary if inflation were to fall closer to its target of 2% and the economy weakened even further.
Andrew Powell, chairman of the Federal Reserve, comments on inflation at the Jackson Hole symposium. He quoted five reasons that inflation would be “transitory” which turned out to be inaccurate in retrospect.
Powell indirectly acknowledged that history at the outset of his remarks Friday, when he said that, “at past Jackson Hole conferences, I have discussed broad topics such as 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.”
