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Fed's Powell Says Taming Inflation Could Lead to 'Some Pain'

By Liz Moyer

Investing.com -- Federal Reserve Chair Jerome Powell said the central bank’s efforts to quash inflation will require a “sustained period of below-trend growth” that will lead to pain for households and businesses.

“These are the unfortunate costs of reducing inflation,” Powell said during a speech at the Fed’s annual meeting in Jackson Hole, Wyo. “But a failure to restore price stability would mean far greater pain.”

Last year, Fed officials insisted inflation would be temporary, but high prices have persisted far longer than they expected, something that has forced policymakers to act aggressively to cool the economy.

Powell has said the central bank is determined to tame inflation, even at the risk of a recession.

He said Friday that the economy continues to show strong underlying momentum but the labor market is "clearly out of balance, with demand for workers substantially exceeding the supply of available workers." Powell's message was that the Fed would continue to fight inflation to get it back to its targeted 2%, and would keep at it until the job is done.

There is debate on just how far the Fed will go at the next policy meeting in September. The futures market indicates a 58.5% chance of another 0.75-percentage point increase, which would be the third such increase in a row. There’s a 41.5% chance the Fed makes a smaller, 0.5-point increase.

"Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook," Powell told the audience Friday.

There is some evidence inflation is leveling off, especially as energy prices have come down in recent weeks.

The housing market is also cooling as rising interest rates and high sales prices push would-be buyers to the sidelines for now. But as earnings reports from retailers showed, consumers feeling pressured by rising food prices are putting off purchases of other items, such as clothing and electronics.

A key set of data came out earlier Friday. The Fed’s preferred measure of inflation, the core personal consumption expenditures index, rose 0.1% in July from June and 4.6% for the year through July, both less than analysts expected.

It was also far lower than June’s readings, an indication inflation is cooling. The core number excludes food and energy prices, which tend to be more volatile.

“While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” Powell said Friday.

"In current circumstances, with inflation running far above 2% and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause," he said.

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