US stock markets nosedived on Friday after the Federal Reserve chair, Jerome Powell, warned of “pain” ahead as the central bank struggles to bring down inflation from a 40-year high.
Powell’s highly anticipated speech was more hawkish than had been expected, with the Fed chair pledging to do all he could to end rising prices. The Dow Jones Industrial Average lost just over 1,000 points, 3%, the S&P fell 3.3% and the Nasdaq dropped almost 4%.
Speaking at the Kansas City Fed’s annual meeting of the world’s central bankers in Jackson Hole, Wyoming, Powell said the Fed’s “overarching focus right now is to bring inflation back down”.
The Federal Reserve has been raising interest rates rapidly in an attempt to slow inflation. Powell said the Fed would continue to use its tools “forcefully” until prices were under control. “We must keep at it until the job is done,” said Powell.
Powell warned there would be consequences to these actions, namely job losses and slower growth.
“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. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” he said.
“These are the unfortunate costs of reducing inflation,” he added.
The Fed was slow to react to rising inflation. At last year’s meeting, Powell dismissed rising prices as a “transitory” phase triggered by supply chain problems related to the coronavirus pandemic.
But as prices have risen at rates unseen since the 1980s the Fed has moved to hike interest rates aggressively and is all but guaranteed to do so again when its committee meets again in September.
At each of its last two meetings the Fed has increased its benchmark federal funds rate by 0.75 percentage points, to a range between 2.25% and 2.5%, the most rapid rate of increase since the early 1990s.
There are signs that the rate of price rises is slowing in the US. Gas prices have fallen markedly and on Friday the commerce department announced that the central bank’s preferred measure of inflation – the Personal Consumption Expenditures (PCE) index – slowed in July to an annual rate of 6.3%, down from 6.8% in June. But the rate of inflation remains far above the Fed’s target rate of 2%.
Powell made clear that the recent good news was unlikely to sway the Fed from its course. “While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the committee will need to see before we are confident that inflation is moving down,” he said.
Central bankers across the world are struggling with similar issues. In the UK economists have predicted inflation will hit 18% in 2023 and millions of households face an 80% energy bill rise from 1 October. China could miss its annual growth target for the first time since 2015 as factory activity falls and the property market faces a crisis.
By comparison, parts of the US economy remain strong, notably consumer spending and the jobs market, where unemployment is at a 50-year low. But Powell emphasized that tackling inflation was now the Fed’s top priority.
“Our responsibility to deliver price stability is unconditional,” said Powell. “It is true that high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States,” but said that did not diminish the Fed’s “responsibility to carry out our assigned task of achieving price stability”.