US Fed chairman pledges to tame high inflation by ‘using our tools forcefully’

Jerome Powell also warns of ‘pain’ continuing for some time in highly anticipated remarks delivered at annual economic symposium
Emphasis on ‘price stability’ follows Beijing meeting airing fears of global recession, financial shocks and worsening US-China ties

US-China relations

Mark Magnierin New York

Published: 2:15am, 27 Aug 2022

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In one of the most closely watched US Federal Reserve speeches in recent memory, with the fate of the global economy hanging in the balance, Chairman Jerome Powell vowed Friday to do whatever is necessary to drive down high inflation, warning of “some pain” ahead even as he acknowledged the global implications of any American policy move.

Powell pledged to “use our tools forcefully”, adding that elevated interest rates were likely to continue for some time, with history cautioning against loosening policy too early before inflation is tamed. His comments follow a closed-door session in Beijing last week that aired fears of a global recession, financial shocks and worsening US-China relations.

“We will keep at it until we’re confident the job is done,” Powell told the annual Jackson Hole Economic Symposium, held in Wyoming since 1982. “It is true that the current high inflation is a global phenomenon and that many economies around the world face inflation as high or higher than seen here in the United States.”

Comments by US central bank officials tend to be purposefully vague as even a few words can send stocks and bonds soaring or plummeting. In his unusually short eight-minute speech, Powell said his remarks were meant to be direct and narrowly focused.

The former investment banker noted some modest cause for optimism, including a slight reduction in the July US inflation rate to 8.4 per cent from its record 8.5 per cent a month earlier. But growth is weakening, the job market remains overheated and a single month’s data is inconclusive.

Inflation expectations also risk creating a self-fulfilling prophecy, Powell added, powering an upwards spiral as households and companies raise wages and prices, leading to yet more inflation.

“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy,” he said. “Without price stability, the economy does not work for anyone.”

Markets fell after Powell’s speech, with the Dow Jones Industrial Average trading down more than 500 points for much of the day.

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Raising interest rates can slow demand by making a range of auto, house and other loans more expensive. Global markets and central bankers will be closely watching the Federal Open Market Committee’s next interest rate move scheduled for September. The outcome will depend on how the US economy performs between now and then, Powell said.

After Powell’s speech, markets appeared divided on whether his comments signalled a third consecutive three-quarter percentage point rise in interest rates or a more moderate half percentage point. The Fed has already raised rates four times this year, totalling 2.25 percentage points.

US monetary policy seeks primarily to address domestic concerns, where inflation has roiled markets, fuelled anger at the gas pump and created political headaches for the administration of President Joe Biden.

But its implications extend farther afield, particularly for developing economies facing food shortages and high debt levels.

While some emerging economies like Brazil and South Africa that sell oil and minerals have benefited from rising prices, others such as China and India that heavily depend on imports have suffered.

China is also trying to buck the tide. Even as most central banks worldwide have raised interest rates in tandem with the Federal Reserve, Beijing has cut rates to boost its economy.

“That makes the situation very tough for China. When they’re cutting rates when every other country in the world is raising rates, money will flow elsewhere,” said Kevin Chen, chief economist at Horizon Financial and an adjunct professor at New York University.

“This is mainly because the Chinese economy needs stimulation. The real estate market is not doing very well and the whole economy needs stimulation, so it’s a totally different situation.”

The growing gap between Chinese and global interest rates has triggered a portfolio-investment outflow for the world’s second-largest economy and stoked concern over greater negative spillover effects, reflected in a transcript released this week of a recent key economic meeting.

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Many investor expectations about the Chinese economy – that zero-Covid policies would not have such a negative economic impact, that underlying fundamentals were stronger and that Beijing would pour on fiscal and monetary stimulus as growth weakened – have been proved wrong, said Shehzad Qazi, managing director of the China Beige Book research group.

“We’re all bracing for slower growth,” said Qazi, adding that he did not expect any further Chinese policy moves before the 20th Party Congress this fall, when President Xi Jinping is expected to secure a third term in office. “The global implications are obviously bearish.”

Powell’s comments come as the central bank tries to navigate a high-wire balancing act working with relatively blunt tools that take time to kick in.

If the Fed raises rates too quickly, it risks pushing the US and potentially the global economy into recession. If it moves too slowly, inflation could intensify, diminishing the value of global assets, eroding purchasing power and leaving millions of people around the world unable to afford food and other basic necessities. Russia’s invasion of Ukraine in February has seen grain and crude oil prices soar globally.

Powell’s speech also carries personal implications. Last year at the same conference, he doubled down on his then-view that inflation was transitory and the result of short-term supply-chain disruptions caused by the coronavirus pandemic. That proved too optimistic as inflation roared back, undercutting his credibility.