US Federal Reserve Chairman Jerome Powell warned that fighting inflation in the United States would be painful for US households and businesses, but inaction would hurt the economy more.
In a tough speech at the annual meeting of central bank governors in Jackson Hole, Wyoming, the head of the Fed warned that the US central bank would aggressively use its “tools” by raising interest rates.
In a brief speech a few months before Joe Biden’s Democratic midterm administration, he said that a return to price stability “will take time” and will lead to “an extended period of weak growth” as well as “a slowdown in the labor market.” .”
Inflation in the US reached 8.5% year on year, compared with 9.1% in June, according to the consumer price index, close to the highest level in forty years.
The Federal Reserve is tracking a price index for personal consumption expenditures, which is based on consumer spending, new data for which was released on Friday. This indicator, which is used to measure inflation, reached 6.3% compared to 6.8% in June in annual rate.
“If this decline recorded in July is to be welcomed, then just one month of improvement is not enough, and this trend should be confirmed,” Powell said.
The Federal Reserve has set a goal of lowering that rate to around 2%, and Powell explained that this policy would incur “annoying costs.”
He reiterated that the Fed is ready for “an exceptionally large rate hike” during the next meeting of the Monetary Committee on September 21, after two consecutive 75-point (0.75%) hikes.
Powell warned the markets that interest rates would enter a “restrictive” zone and that the neutral rate threshold, which reflects the ideal rate level and is usually estimated at around 2.5% so as not to cause the economy to worsen or stabilize, is no longer on the table.
He continued: “Long-term estimates of the neutral rate are not a threshold at which to dwell.”
“At some point, it will be appropriate to slow down the pace of interest rate hikes,” Powell added, warning in his “direct” speech that “history has shown that monetary policy should not be eased prematurely.”
Powell acknowledged that “current inflation is a global phenomenon and that many economies around the world are facing price increases equal to or greater than those in the United States.”
In an effort to contain the price boom, the Federal Reserve raised daily interest rates affecting all other loans from zero to 2.25% to 2.50% since spring and are expected to reach at least 3.8% next year, according to to the latest average forecast of the Central Bank, published in June.
In his speech, Powell repeatedly cited former Federal Reserve Chairman Paul Volcker, who managed to control accelerating inflation with an iron fist in the early 1980s.
Source: AFP.