Powell has made it clear officials will continue to act aggressively to cool the economy and avoid a repeat of the 1970s and early 1980s, the last time US inflation got out of control.
It took tough action – and a recession – to finally bring prices down in the 1980s, and the Fed is unwilling to give up its hard-won, inflation-fighting credibility.
Amid criticism the Fed waited too long to move, Powell said the US central bank is committed to raising interest rates and keeping them high until inflation comes down, and he warned against reversing course too soon.
“The historical record cautions strongly against prematurely loosening policy,” Powell told reporters.
He said there is no room for complacency and the Fed will “keep at it until the job is done,” although at some point it will be appropriate to slow the pace of rate increases, depending on the data.
INFLATION FIGHT NOT “PAINLESS”
He acknowledged that bringing inflation down will require a period of slower growth and higher unemployment, noting that the job market is out of sync, with far more openings than workers.
“We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t,” said Powell.
But he said continued high inflation would be even more painful, especially on those least able to withstand it.
Economist Diane Swonk of KPMG said Powell “has stopped sugar-coating” what the battle to tame inflation will entail: “Growth will weaken and the unemployment rate will move up.”
The Fed’s quarterly forecasts released with the rate decision Wednesday show FOMC members expect US GDP growth to virtually flatline this year, rising just 0.2 per cent. But they see a return to expansion in 2023, with annual growth of 1.2 per cent.
They project further rate hikes this year – totalling 1.25 percentage points — and more in 2023, with no cuts until 2024.
While the FOMC noted continued “robust” job gains in recent months and low unemployment, the forecasts project the jobless rate will rise to 4.4 per cent next year and hold around that level through 2025 from 3.7 per cent in August.
Inflation is a global phenomenon amid the Russian war in Ukraine on top of global supply chain snarls and COVID-19 lockdowns in China, and other major central banks are taking action as well.
Despite a welcome drop in gasoline prices at the pump in recent weeks, the disappointing consumer price report for August showed widespread increases.
The FOMC statement noted the “broader price pressures” beyond food and energy, and stressed that officials are “strongly committed to returning inflation to its 2 per cent objective”.
The rate hikes raise the cost of borrowing and cool demand, and it is having an impact: The housing market has slowed as mortgage rates have surged.
Many economists say at least a short period of negative US GDP in the first half of 2023 will be needed before inflation starts coming down.
Nancy Vanden Houten of Oxford Economics said the updated Fed forecasts acknowledge “the toll that higher rates will take on the economy”. but she said “their projections are more optimistic than our own”.