Federal Reserve Chairman Jerome Powell had some sobering comments on inflation that didn’t go down well on Wall Street. In fact, his words sent some investors running for the hills. The Dow dropped 1,000 points, or more than 3% of its value after his speech in Jackson Hole, Wyoming.
Inflation is more than “just a word,” as one Democratic congressman believes. It’s more than a political construct that Republicans are using to beat up Joe Biden.
Inflation is real and it’s going to be here for a while so get used to it, said Powell in so many words.
Related: Democrats Try to Explain How the Inflation Reduction Act [Sic] Will Lower Inflation
Amid the breathtaking mountain scenery, Powell brought investors back to earth in a speech that lasted only 10 minutes. “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” Powell said.
“These are the unfortunate costs of reducing inflation,” Powell said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole. “But a failure to restore price stability would mean far greater pain.”
Investors had been hoping for a signal from Powell that the Fed might soon moderate its rate increases later this year if inflation were to show further signs of easing. But the Fed chair indicated that that time may not be near, and stocks tumbled in response.
Some investors were expecting Powell to speak more hopefully about the near future. There was some hope that with moderating fuel prices and a still-strong job market, the Fed wouldn’t wait until the economy had tipped into recession before cutting rates again.
That doesn’t look likely now.
“The idea they are trying to hammer into the market’s head is that their approach makes a rapid pivot to (rate cuts) unlikely,” said Eric Winograd, an economist at asset manager AllianceBernstein. “They are going to stay tight even when it hurts.”
After raising its key short-term rate by a steep three-quarters of a point at each of its past two meetings — part of the Fed’s fastest series of hikes since the early 1980s — Powell said the Fed might ease up on that pace “at some point,” suggesting that any such slowing isn’t near.
What should be encouraging for most of us is that Powell, like his 1980s predecessor Paul Volker, appears willing to wring inflation out of the economy even if his rate hikes tip the country into recession. Volker had a much tougher job with inflation hitting 13.5% in 1980 and the resulting pain caused the unemployment rate to rise to 10.8% and interest rates to hit 18.4% in October of 1981.
It’s not expected to be that bad this time. But Democratic politicians, including the president, are likely to start putting public pressure on Powell and the Fed to ease up on rates at the first sign that inflation may be dropping. Powell says it would be unwise, but the Fed is as susceptible to politics as any organization in Washington. And if Biden piles on and starts jawboning Powell, that’s a hard sell to resist.
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