Business
Federal Reserve Warns Over 40-Year-High Inflation Rate, Says More Pain Coming
US Federal Reserve chairman Jerome Powell has warned the Biden Administration that businesses and families will suffer if high inflation isn’t tamed, saying failing to bring prices down from their current 40-year high will be even worse
Chairman Powell did not hold back or leave any room for doubt about the central bank’s course, pledging to act in a “forceful” manner. For the sake of reducing inflation, he warned the world’s largest economy will likely slow for an extended period, and the US job market will suffer.
The US Federal Reserve has been on an aggressive campaign to raise interest rates — with Chairman Powell making it clear that the fight against inflation is not over.
He told a room full of financial industry leaders, restoring price stability will take time. “We must use our tools forcefully to bring demand and supply back into balance,” he said.
Federal Reserve Interest Rate
High US Inflation can only be reduced by higher interest rates which will slow growth, and softer labour market conditions, financial pain will be felt by most households and businesses,” Chairman Powell stated in his address.
However, if there is no restoration of price stability, then there will be far greater pain to endure.”.
Powell made it clear that Fed policy and the benchmark borrowing rate would have to remain “sufficiently restrictive” to return inflation to its two percent target.
The Federal Reserve has hiked rates four times to contain red-hot US inflation, which exceeded 9% in June because of massive government spending under the Bush administration.
In June and July, rates increased by a massive three-quarter point – an unprecedented move since the 1980s – to a range of 2.25% to 2.5%.
Powell warned that another three-quarter point increase might be necessary at the next policy meeting on Sept 20 and 21.
Fed Missed the Mark on Inflation
Meanwhile, Adam Posen, the Peterson Institute for International Economics’ director and former Bank of England board member, predicts that by the end of February the benchmark lending rate will reach 4% and that the Fed will be willing to go further if necessary, with the chance of a reversal in 2023 being very, very slim.
Stocks on Wall Street extended losses on Friday after Powell’s comments, which prompted traders to predict a sharp move next month.
In the wake of the speech, money market traders now see a 55% chance of a 75-basis-point rate hike in September, up from 45% before.
A number of critics have criticized the Federal Reserve for failing to predict the inflationary surge, which the Fed initially viewed as temporary.
When Powell said a year ago that inflation was limited to a relatively narrow group of goods and services, it had already spread within months and the Fed had upped interest rates from near zero before inflation had reached their target of 2%.
