By: Ken Chase.
In his annual speech in Jackson Hole, Wyoming last week, Federal Reserve Chairman Jerome Powell reiterated the Fed’s firm commitment to doing whatever it takes to halt persistent inflation. Moreover, he indicated that he fully expects the Fed’s inflation-fighting strategy to cause at least some pain for U.S. households and the broader economy.
Powell’s remarks seemed to be designed to push back on recent hopes that the Fed might soon reverse course on its previously announced plan to aggressively raise interest rates throughout 2022. Some political leaders and friendly media outlets have suggested that interest rate hikes might level off in the wake of last month’s slightly lower inflation rate. According to the Fed Chair, however, it would be a mistake to end the fight before inflation is truly under control:
“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”
Powell reminded the attendees that a lack of serious inflation-fighting efforts throughout the 1970s led to entrenched inflation that required even harsher measures in the following decade. “The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years,” he noted.
“A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.”
Chairman Powell also reminded his listeners of the importance of fighting inflation before it becomes entrenched in the public consciousness. He cited former Fed Chair Paul Volcker’s observation that inflation can feed on itself as households and businesses come to expect rising prices and begin to base economic decisions on that expectation. According to Powell,
“Inflation has just about everyone’s attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.”
U.S. markets responded to the speech with a massive sell-off, with the S&P 500 dropping 5% in the three days after Powell’s remarks and the Nasdaq declining by almost 7% .