Fed’s Powell: Prepare for more pain ahead

“We have always understood that restoring price stability with a relatively modest increase in unemployment and a weak decline would be very difficult,” Powell said.

The latest rate hike comes just weeks before the midterm elections, and while the central bank has generally maintained political support for moves, including from President Joe Biden and nearly all Republicans, there is an increasing backsliding.

“The Fed decided today to risk mass unemployment in its fight against inflation,” Janelle Jones, a former chief economist at Biden’s Department of Labor who now works for the Service Employees International Federation, tweeted. “Raising interest rates, and pushing the economy into recession, will either lead to unemployment or cut the salaries of millions of workers.”

For their part, Fed officials hope that the battle for inflation will be largely won by 2024, at which point they expect to begin cutting interest rates again to less punitive levels.

Is there more we should know?

A three-quarter percentage point rate hike — three times the typical historical increase — raises the Fed’s key borrowing rate to its highest level since 2008, and it has reached that level at an astonishing rapid pace. That rate is now between 3 percent and 3.25 percent, just six months after stopping from zero, moves that caused mortgage rates to rise and stocks to fall (however, consumers are still spending). Officials expect to continue raising rates beyond 4 percent by the end of the year.

Asked whether the Fed’s unemployment forecasts indicated officials no longer expected to avoid a painful recession, Powell acknowledged that their forecast indicated a “modest” increase in the unemployment rate by historical standards to 4.4 percent next year, based on how quickly they see inflation. . dilution.

That’s because current economic conditions are different from any previous Fed campaign to raise interest rates.

First, job opportunities can decrease without causing a significant increase in the unemployment rate. Second, neither markets nor consumers expect inflation to continue at such a high level. And third, the supply shocks that fueled price pressures are slowly starting to improve.

“To what extent these factors will really become important in this sequence of events remains to be seen,” Powell said.

There were several other key messages from the head of the central bank. Let’s break Fedspeak:

“Participants continue to view inflation risks as likely to the upside.”

This means that Fed officials are more concerned that inflation will suddenly get worse than that it will improve unexpectedly. The result? The central bank makes the mistake of making higher and faster decisions because it does not want people to get used to higher prices and start building them into their budget decisions, as expectations take hold.

“My main message hasn’t changed since Jackson Hole.”

That’s a nod to his short, explosive rhetoric – well, the cautious Fed chair – at the central bank’s annual conference in Jackson Hole, UE, is Powell’s hawkish message at the time? The pain is coming. He has let investors and the public know that nothing has happened since August which gives him more comfort about inflation.

It will likely take some time to see the full effects of changing financial conditions on inflation; We are very keen on that… at some point, it will become appropriate to slow the pace of price hikes.”

The Fed is raising interest rates quickly, and while it is deeply hurting Americans’ wealth (stock prices are down, the housing market has swung) and interest rates are up, it could take months for that to start affecting people’s spending behaviour. For now, the central bank is trying to raise interest rates to levels that numbers experts internally believe will be enough to cool inflation. But eventually, the Fed will need to start moving more slowly to look around and gauge whether its moves are working.

“We don’t know, and nobody knows, whether this process will lead to a recession or if so, how significant that recession will be.”

This doesn’t need much translation: Powell makes no promises about what will happen to the economy. Lowering inflation is job #1.

Kate Davidson contributed to this report.

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