US Fed chief Powell talks tough, warns of 'unusually high' rate hikes

Federal Reserve Chair Jerome Powell signaled the US central bank is likely to keep raising interest rates and leave them elevated for a while to stamp out inflation, and he pushed back against any idea that the Fed would soon reverse course.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks prepared for the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”

"Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," Powell said in a speech kicking off the Jackson Hole central banking conference in Wyoming.

He said restoring inflation to the 2 per cent target is the central bank’s “overarching focus right now” even though consumers and businesses will feel economic pain.

"These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

He reiterated that another “unusually large” increase in the benchmark lending rate could be appropriate when officials gather next month, though he stopped short of committing to one.

“Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook,” he said.

The decision of how much to increase rates "will depend on the totality of the incoming data and the evolving outlook," Powell said, with further jobs and inflation reports to come.

To quell inflation, though, Fed policymakers have said they need to curb demand for goods and services by raising borrowing costs and making it more costly to finance homes, cars and business investment. As the process bites, as it is beginning to do, particularly in the housing market, companies may adjust their hiring plans or even resort to layoffs.

Two-year Treasury yields. rose as investors digested the remarks, pushed as high as 3.44 per cent while the 2- to 10-year yield curve resumed its flattening. Equities were lower. Prior to Powell’s speech, investors saw the odds of a half-point or another three-quarter point hike at the Fed’s September 20-21 gathering as roughly even.

They remained in that vicinity after he spoke, but the amount of reductions in fed rates priced for 2023 briefly retreated.

Powell delivered his speech to a roomful of international policymakers and economists gathered at a mountain lodge to discuss how the Covid-19 pandemic put new constraints on the world economy, and the implications of that for central banks.

Inflation is now their chief concern, and Powell's remarks at the symposium, hosted by the Kansas City Fed, set a tone likely to register on global markets. It was also a message major central banks are preaching in unison that rate hikes are meant to slow economies, and a commitment that won't waiver until inflation falls.