Fed Chairman Powell says fighting inflation could create a heavy burden on Americans
Federal Reserve Chairman Jerome Powell addressed current inflation challenges at the latest Jackson Hole conference last week, saying that lowering inflation could create a heavy burden on American families.
The Consumer Price Index (CPI), a measure of inflation, rose 8.5% annually in July, according to the Bureau of Labor Statistics (BLS). This is down slightly from 9.1% in June, but still near a 40-year high.
But despite this drop, inflation is still well above the Fed’s 2% target. In order to bring down inflation again, the Federal Reserve raised interest rates. The Federal Open Market Committee recently raised rates at its July meeting by 75 basis points, raising the Fed’s target range to 2.25% to 2.5%. This is the fourth time in 2022 that the Fed has raised interest rates, and economists expect this trend to continue in the coming months.
“The FOMC’s overall focus right now is to get inflation back to our 2% target,” Powell said at the conference. “Price stability is the responsibility of the Federal Reserve and it is the bedrock of our economy. Without price stability, the economy is not working for anyone.
“In particular, without price stability, we will not achieve a sustainable period of strong labor market conditions that are beneficial to all,” he continued. “The burden of high inflation falls on the least able to bear it.”
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Americans can struggle with rising interest rates and inflation
In his speech, Powell said the Fed would need to take aggressive action in order to bring down inflation, which could put pressure on American families.
“Restoring price stability will take time and require aggressive use of our tools to achieve a better balance between supply and demand,” Powell said. “Reducing inflation is likely to require a sustained period of growth below the general trend. Moreover, it is very likely that there will be some easing in labor market conditions.“
And while fighting inflation would have a fiscal multiplier, Powell said the alternative is worse.
“While high interest rates, slow growth, and weak labor market conditions will bring inflation down, they will also cause some pain to households and businesses,” he said. “These are the unfortunate costs of lowering inflation. But failure to restore price stability will mean much more pain.”
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Inflation reaches 8.5% annually in July, and the monthly rate remains unchanged
The Fed is likely to keep raising interest rates
Powell said the Fed is likely to continue raising interest rates in order to cool rising inflation, even if the economy worsens.
“Inflation exceeded 2%, and high inflation continued to spread through the economy,” Powell said. “While the lower inflation readings for July are welcome, the one-month improvement is much less than what the committee will need to see before we can be confident of lower inflation.”
Powell stated that after two rate hikes of 75 basis points, another similar increase could be rolled out in September. However, the rate of increases may eventually slow down.
“July’s increase in the target range was the second 75 basis point increase in many meetings, and I said at the time that another unusually large increase might be appropriate at our next meeting,” Powell said. “We are now almost halfway through the period of meetings.
“Our decision at the September meeting will be based on the overall data received and changing expectations,” he said. “At some point, as the monetary policy stance tightens, it will probably become appropriate to slow the pace of the increases.”
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