Powell delivered an unusually short speech on Friday as part of his annual address in Jackson Hole, Wyoming. In his remarks, Powell got right to the point and said that the central bank would continue to raise interest rates “forcefully” in order to return price stability to the economy.
“Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said. “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.”
The United States has now had two quarters of negative gross domestic product growth — a pattern that is typically associated with a recession. The negative GDP growth is a sign that the economy has slowed down, something that the Fed’s aggressive rate hiking cycle has contributed to.
“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” Powell said.
After an unprecedented two years of interest rates at near-zero levels, the Fed finally conducted its first rate hike in March, raising rates by the typical quarter of a percentage point. That hike was followed up by a more desperate half-percentage-point, or 50-basis-point, increase in May, although inflation persisted.
In June, central bank officials announced that the Fed would raise its interest rate target by a whopping three-quarters of a percentage point. The Fed then conducted another 75-basis-point hike in July.
Powell said on Friday that “another unusually large increase” might be appropriate for the central bank’s meeting next month.
Inflation is now running at 8.5% in the 12 months ending in July, according to the consumer price index. That is down from a June peak of above 9%.
Powell pointed out that recent economic data indicated both positive and negative signs for the economy. For instance, the housing market has seen broad declines over the past several months, while the labor market has proved resilient in light of the aggressive rate hiking.
“While the latest economic data have been mixed, in my view, our economy continues to show strong underlying momentum,” he said.
Powell also warned that the tight labor market will likely not continue to notch unexpectedly strong gains and that employment might take a hit as the Fed continues to battle inflation — although he was emphatic that would not deter central bankers from their core mission right now, which is bringing about price stability.
“History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting,” the Fed chairman said.
On Friday morning, just before Powell’s speech, the personal consumption expenditures price index increased by 6.3% on an annual basis and decreased by 0.1% for the month of July, according to data released by the Bureau of Economic Analysis Thursday morning.
The PCE is the Fed’s preferred inflation gauge, and because it came in better than expected, a majority of investors began pricing in a 50-basis-point hike for September, which while it remains aggressive, is less than the more forceful hikes of the last two Fed meetings.
But following Powell’s hawkish speech, investors now foresee a greater likelihood of another massive 75-basis-point hike coming down the pipeline next month.
The likelihood of such a hike occurring was pegged at more than 56% following the Jackson Hole speech, according to CME Group’s FedWatch tool, which calculates the probability using Fed fund futures contract prices.