"These are the unfortunate costs of reducing inflation," Powell announced 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. Yet the Fed chair suggested that that time may not be near.
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Runaway price increases have soured most Americans on the economy, even as the unemployment rate has fallen to a half-century low of 3.5%. It has further formed political risks for President Joe Biden and congressional Democrats in this fall's elections, with Republicans denouncing Biden's $1.9 trillion financial backing package, approved last year, as having fueled inflation.
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Stocks tumbled after Powell's comments, and bond yields rose, indicating that investors anticipate more large interest rate hikes ahead. Some on Wall Street expect the economy to fall into recession later this year or early next year, after which they hope the Fed to reverse itself and reduce rates.
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Several Fed officials have pushed back against that notion. Powell's remarks suggest that the Fed is seeking to raise its benchmark rate — to about 3.75% to 4% by next year — yet not so high as to tank the economy, hoping to delay growth long enough to conquer high inflation. "The idea they are trying to hammer into the market's head is that their approach makes a rapid pivot to (rate cuts) unlikely," announced Eric Winograd, an economist at asset manager AllianceBernstein. "They are going to stay tight even when it hurts."
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After increasing its key short-term rate by steep three-quarters of a point at each of its past two meetings — part of the Fed's fastest series of rate increases since the early 1980s — Powell announced that the Fed might ease up on that pace "at some point" — suggesting that any such slowing isn't near.
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Powell stated the size of the Fed's rate increase at its next meeting in late September — whether one-half or three-quarters of a percentage point — will depend on inflation and jobs data. An increase of either size would exceed the Fed's traditional quarter-point hike, reflecting how severe inflation has become.
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The Fed chair announced that while lower inflation readings that have been reported for July have been "welcome," he continued that, "a single month's improvement falls far short of what (Fed policymakers) will need to see before we are confident that inflation is moving down."
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