JACKSON HOLE, Wyo: Americans are headed for a painful period of slow economic growth and possibly rising joblessness as the Federal Reserve raises interest rates to beat 40-year high inflation, Fed Chair Jerome Powell warned Friday in his bluntest language yet about what is in store for the world’s biggest economy.
In a speech kicking off the Jackson Hole central banking conference in Wyoming on Friday, Powell said the Fed will raise borrowing costs as high as needed to restrict growth, and would keep them there “for some time” to bring down inflation that’s running at more than three times the Fed’s 2% goal.
“Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions,” Powell said. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
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As that pain increases, Powell said, people should not expect the Fed to dial back its monetary policy quickly until the inflation problem is fixed. “I thought the message was strong and right,” said Cleveland Fed President Loretta Mester in an interview with Bloomberg TV after the speech. “I think we’re going to have to move (short-term interest rates) up ... above 4% and probably need to hold them there next year.”
Some investors anticipate the Fed will flinch if unemployment rises too fast, with some even penciling in interest rate cuts next year. To the contrary, Powell and other policymakers are signaling that even a recession would not budge them if inflation is not convincingly heading back to the Fed’s 2% target. Powell gave no indication on Friday of how high interest rates might rise before the Fed is finished, only that they will go as high as needed.
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