The US Federal Reserve will continue to raise rates sharply “for a while”, says Powell | Radio-Canada News

On Friday, US Federal Reserve Chairman Jerome Powell delivered a clear message: the Fed is likely to impose larger interest rate hikes in the coming months and is firmly focused on controlling inflation the most. highest for four decades.

Powell also warned more explicitly than in the past that the Fed’s continued tightening of credit will hurt many households and businesses as its higher rates further slow the economy and potentially lead to job losses.

“These are the unfortunate costs of reducing inflation,” he said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole, Wyo. “But a failure to restore price stability would mean far greater pain.”

Investors had hoped for a signal that the Fed might moderate its rate hikes later this year if inflation showed further signs of slowing. But the Fed Chairman indicated that time may not be near.

“I’m not surprised at anything he had to say,” said David Baskin, founder of Baskin Wealth Management in Toronto. “Central bankers’ biggest fear is that inflation is slipping away from them, and by that I mean everyone expects inflation to stay high.”

The Fed is trying to manage inflation expectations and concerns, such as workers and unions potentially seeking higher increases and suppliers raising prices in anticipation of rising product costs, Baskin added.

“What central bankers really need to do is break the cycle of expectations and make people believe that inflation is going to come down and come down pretty quickly. And their tool to do that, of course, is to raise rates. of interest.”

Fed could slow pace of rate hikes ‘at some point’

After raising its short-term key rate by three-quarters of a point in each of its last two meetings — part of the Fed’s fastest series of rate hikes since the early 1980s — Powell said the The Fed could slow that pace “at some point.” – suggesting that such a slowdown is not near.

Powell said the extent of the Fed’s rate hike at its next meeting in late September — whether it’s half or three-quarters of a percentage point — will depend on data on inflation and the use. A hike of either size, however, would top the Fed’s traditional quarter-point hike, reflecting how severe inflation has become.

Sal Guatieri, senior economist at BMO, wrote that economists would be looking for a 50 basis point hike, with rates peaking between 3.50% and 3.75%, when the next rate hike is announced on September 21.

Such a move “should be ‘tightly enough’ to cool demand and gradually reduce inflation without tipping the economy into a deep downturn,” Guatieri wrote.

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While the weaker inflation readings that were reported for July were “welcome,” the Fed Chairman said, “the single-month improvement is well below what the Committee will need to see before that we are convinced that inflation is falling”.

Powell noted that the history of high inflation in the 1970s, when the central bank sought to counter high prices with only intermittent rate hikes, shows the Fed needs to stay focused.

“The historical record strongly cautions against ‘prematurely lowering interest rates,’ he said. “We have to keep going until the job is done.”

Powell’s speech is the highlight of the Fed’s annual economic symposium in Jackson Hole, the first time the central bankers’ conference has been held in person since 2019, as it went virtual for two years during the COVID-19 pandemic. 19.

Since March, the Fed has implemented its fastest pace of rate hikes in decades in an attempt to rein in inflation, which has hurt households with soaring costs for food, gas, rent and other necessities. The central bank raised its benchmark rate by two percentage points in just four meetings, to a range of 2.25% to 2.5%.

These increases have led to higher costs for mortgages, auto loans and other consumer and business borrowing. Home sales have fallen since the Fed first announced it would raise borrowing costs.

Slow down the economy without triggering a recession

In June, Fed policymakers indicated they expect to end 2022 with their policy rate in a range of 3.25% to 3.5%, then to rise further next year to between 3 .75% and 4%. Should rates reach projected levels by the end of this year, they would be at their highest level since 2008.

Powell is betting he can engineer a high-risk outcome: slowing the economy enough to ease inflationary pressures, but not so much as to trigger a recession.

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The Fed Chairman’s task has been complicated by the murky picture of the US economy: On Thursday, the US government said its economy shrank at an annual rate of 0.6% between April and June, the second quarter consequent contraction. Yet employers are still hiring quickly and the number of people applying for unemployment assistance – a measure of layoffs – remains relatively low.

At the same time, inflation is still crushing, although it has shown some signs of easing, notably in the form of lower gasoline prices.

At its July meeting, Fed policymakers voiced two competing concerns that shed light on their delicate task.

According to the minutes of that meeting, the officials – who are not identified by name – prioritized their fight against inflation. Still, some officials said there was a risk the Fed would raise borrowing costs more than necessary, risking a recession. If inflation moves closer to the Fed’s 2% target and the economy weakens further, these differing views could become difficult to reconcile.

At the Jackson Hole symposium last year, Powell listed five reasons why he thought inflation would be “transient.” Yet he rather persisted, and many economists noted that these remarks had not aged well.

Powell indirectly acknowledged this history at the start of his remarks on Friday, when he said that “At past Jackson Hole conferences I have discussed general topics such as the ever-changing structure of the economy and the challenges of the conduct of monetary policy”.

“Today,” he said, “my remarks will be shorter, my focus narrower, and my message more direct.”

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