Jerome Powell smashed hopes that the US Federal Reserve would take a less aggressive stance at its next interest rates decision, and said a single month of lower inflation was insufficient to decide against higher rates at the coming meeting in September.
The US Fed chair confirmed long-running assumptions that higher interest rates were going nowhere fast at the annual Jackson Hole convention on Friday.
“Inflation is running well above 2%, and high inflation has continued to spread through the economy. While the lower inflation readings for July are certainly 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,” said Powell.
He commented the US economy was evidently slowing from its high growth rates of 2021, however the economy continued to show strong underlying momentum.
Powell added the employment market remained tight and out of balance, with demand for workers considerably exceeding the supply.
“The Federal Open Market Committee’s overarching focus right now is to bring inflation back down to our 2% goal. Price stability is the responsibility of the Federal Reserve, and serves as the bedrock of our economy. Without price stability, we will not achieve a sustained period of strong labour market conditions that benefit all,” said Powell.
“Restoring price stability will take some time, and requires using our tools forcefully, to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below trend growth.”
“Moreover, there will very likely be some softening of labour market conditions, while higher interest rates, slower growth and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. But a failure to restore price stability would mean far greater pain.”
He said the most recent interest rates hike to 2.25% to 2.5% was within the summary of economic projections range of estimates for where the federal funds rate was projected to settle in the long term.
However, the next decision would depend on the overall picture of the US economy and its general outlook by the time of the US Fed’s next meeting.
“We our moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook.”
“In current circumstances with inflation running far above 2% and the labour market extremely tight, estimates of longer run neutral are not a place to pause or stop.”
Powell added that restoring price stability would likely mean employing a restrictive policy for “some time.”
