Jay Powell says Fed will ‘keep at it’ in hawkish inflation speech

Jay Powell declared the Federal Reserve “must keep at it until the job is done” as he used a speech at Jackson Hole to deliver his most hawkish message to date on the US central bank’s determination to tame surging inflation by raising interest rates.

In a hotly anticipated address, the Fed chair said that successfully reducing inflation would probably result in lower economic growth for “a sustained period”. To do that, interest rates would need to stay at a level that restrains growth “for some time”, he warned.

The US stock market slid sharply after Powell spoke, with the benchmark S&P 500 index falling 2.5 per cent and the tech-heavy Nasdaq Composite declining 3.1 per cent, the biggest drawdowns for the two indices since June.

Powell predicted there would “very likely be some softening of labour market conditions” and “some pain” for households and businesses. “A failure to restore price stability would mean far greater pain,” he added.

Yields on short-dated US government debt climbed. On the policy-sensitive two-year Treasury note, the yield increased 0.03 percentage points to 3.39 per cent. The yield on the 10-year note — which moves with growth and inflation expectations — rose 0.01 percentage points to 3.03 per cent. Yields rise when a bond’s price falls.

Powell’s speech contrasted with his message at last year’s Jackson Hole symposium, when he predicted that surging consumer prices were a “transitory” phenomenon stemming from supply chain-related issues. It has since become clear that inflation is demand-driven and therefore likely to persist for longer.

“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored,” Powell said.

The Fed chair harked back to the lessons of the 1970s, when the US central bank presided over a period of turmoil after it made several policy blunders and failed to rein in inflation. That forced Paul Volcker, who became Fed chair in August 1979, to choke the economy and cause more pain than would have been necessary if officials had acted more quickly.

Fed watchers noted that “Keeping At It” — a phrase that Powell used twice in his speech — is the title of Volcker’s 2018 memoir, which was published just over a year before he died.

“The historical record cautions strongly against prematurely loosening policy,” said Powell.

The main lesson of that period was that “central banks can and should take responsibility for delivering low and stable inflation,” he said, reiterating the Fed’s “unconditional” commitment to tackling price growth.

He also highlighted the risk posed by inflation remaining too high for too long, setting off a chain reaction with people expecting further price increases.

“The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” he warned.

Financial markets had rallied in recent weeks amid expectations the Fed might ease up its efforts to damp demand as economic data deteriorated further and concerns…