Fed's Powell sees inflation fight lasting 'some time,' warns of economic pain

The US economy will need tight monetary policy "for some time" before inflation is under control, which means slower growth, a weaker job market and "some pain" for households and businesses, Federal Reserve Chair Jerome Powell said on Friday in remarks that warned there is no quick cure for fast rising prices.

"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. 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," Powell said in a speech kicking off the Jackson Hole central banking conference in Wyoming.

"These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

As that pain gets greater, Powell said, people should not expect the Fed to dial back quickly until the inflation problem is fixed.

Some investors anticipate the Fed will flinch if unemployment rises too fast, with some even penciling in interest rate cuts next year, an outlook UScentral bank officials have leaned hard against in recent weeks.

To the contrary, some policymakers have indicated even a recession would not dissuade them if prices are 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 move as high as needed.

"The historical record cautions strongly against prematurely loosening policy," Powell said. "We must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay."

Powell did not hint at what the Fed might do at its upcoming Sept. 20-21 policy meeting. Officials are expected to approve either a 50-basis-point or 75-basis-point rate increase.

Dollar rebounds as Powell commits to fighting inflation

Rate futures contracts fell after Powell's speech as some traders began pricing in the rate path the Fed chief sketched out, but continued to reflect an expectation the central bank's benchmark overnight interest rate would rise to the 3.75%-4.00% range by next March and would begin slowly falling six months later. The Fed's policy rate is currently in a target range of 2.25%-2.50%.

Recent data have shown some small decline in inflation, with the Fed's closely watched personal consumption expenditures price index falling in July to 6.3% on an annual basis, from 6.8% as of June. 

But "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," Powell said, referring to the central bank's policy-setting Federal Open Market Committee.

Other statistics have shown what Powell said was "strong underlying momentum," with the job market "clearly out of balance" given job openings are far in excess of the number of unemployed.

The decision of how much to increase rates "will depend on the totality of the incoming data and the evolving outlook," Powell said, with further jobs and inflation reports to come.

The Fed has become increasingly open that its policies may lead to a rise in the USunemployment rate, currently at 3.5%, a level that has not been eclipsed in more than 50 years.

To quell inflation, though, Fed policymakers have said they need to curb demand for goods and services by raising borrowing costs and making it more costly to finance homes, cars and business investment. As the process bites, as it is beginning to do, particularly in the housing market, companies may adjust their hiring plans or even resort to layoffs.

MORE GROUNDED APPROACH
Powell delivered his speech to a roomful of international policymakers and economists gathered at a mountain lodge to discuss how the Covid-19 pandemic put new constraints on the world economy, and the implications of that for central banks.

Inflation is now their chief concern, and Powell's remarks at the symposium, hosted by the Kansas City Fed, set a tone likely to register on global markets. It was also a message major central banks are preaching in unison that rate hikes are meant to slow economies, and a commitment that won't waiver until inflation falls.

In prior appearances at the Jackson Hole conference, Powell's remarks have involved high-level discussions of Fed strategy and analysis.

He acknowledged that in his opening remarks. But with the Fed trying to keep markets and the general public apprised of what is coming in the future, he said the intensity of the moment required a more grounded approach.

"Today, my remarks will be shorter, my focus narrower, and my message more direct," Powell said.