Fed’s Powell says higher interest rates will bring down inflation, but also inflict ‘pain’ on Americans

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According to Federal Reserve head Jerome Powell, taming United States (US) inflation will cause “pain” to American families and businesses, but failing to force prices down from their current 40-year high would be even more harmful. Powell made the remarks in a highly-anticipated speech to international policymakers on Friday. 

Powell did not hold back or leave any space for doubt when he spoke to the annual meeting of central bankers at Jackson Hole, Wyoming, promising to act “forcefully.” 

The strong US employment market will suffer as a result of the world’s greatest economy possibly slowing for an extended period, he warned. He referred to these repercussions as the “unfortunate costs of reducing inflation.”

This year, the Fed aggressively campaigned to raise interest rates, and Powell made it clear in his unusually brief and very forthright speech that the struggle against inflation is far from done. 

In front of the breathtaking Grand Teton mountains, he said, “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance.” 

Inflation will be reduced by higher interest rates, slower growth, and softer labour market conditions, but Powell warned that this will hurt both households and companies. 

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But failing to bring back price stability will cause even more suffering.

The US economy is showing modest indications of slowing down, and price pressures are lessening, which has given financial markets hope that the central bank may scale down its aggressive rate hikes and possibly start to reverse course next year. 

Powell, however, put an end to expectations of a change in policy by emphasising that the Fed’s monetary policy and the benchmark borrowing rate would need to stay “sufficiently restrictive” in order to bring inflation back down to the goal rate of 2 per cent. 

The announcement caused a downturn in the US stock market, with all three major stock indices falling three per cent or more, with the Dow shedding 1,000 points.

(with inputs from agencies)

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