Jay Powell says the Fed will "keep at it" in his hawkish speech about inflation.

It’s unlikely any financial improvement will come from the US, as the chairman of their central bank warned that a “sustained period” of lower growth lies ahead.

Powell delivered a speech at Jackson Hole, where he announced the Federal Reserve’s intention to keep interest rates high in order to combat soaring inflation. The US central bank doesn’t intend on making any sudden changes.

A quote from Chairman Powell’s address at the first in-person gathering of global central bankers since the start of the coronavirus pandemic: “Reducing inflation will probably result in “a sustained period of below-trend growth” The majority of economists forecast a decline in the labour market.

“Some pain” will be inevitable for many households in order to achieve our inflation target, but “far greater pain” will follow if we fail to do so.

Fed Chairman Jerome Powell sought to dispel any doubts over the bank’s plan to continue control of inflation. The economy has tightened its monetary policy aggressively in recent months and it seems the decision won’t change anytime soon.

The US stock market reacted negatively to the US Federal Reserve Chairman Jerome Powell’s speech when it slid 2.2%. The Dow Jones Industrial Average and S&P 500 decreased by 2.2%, while the Nasdaq Composite lost 2.7% of its value.

US bonds prices slid after the announcement. On the policy-sensitive two-year Treasury note, the yield increased to 3.41%. There was a little change to the 10-year yield, which moved with changes in growth and inflation expectations. The yield went up when the price of bond went down.

The Fed is taking steps to regulate demand so that it meets supply better. This will help keep inflation expectations in line and maintain stability for the future.

Powell’s speech is a stark contrast to last year’s, when he said that rising prices were just a transitory issue caused by supply chain-related problems. Recently, it has become apparent that consumers are responsible for the rise in inflation and that this trend is likely to continue.

The Fed chair mentioned the lessons of the 1970s, a time in America when policies went wrong and inflation had been at its highest. That’s why when Paul Volcker became Fed Chair in August 1979, he immediately choked the economy which made it necessary for him to make tough decisions. This caused more pain than had been anticipated if officials had acted sooner.

“The historical record cautions strongly against prematurely loosening policy,” said Powell as he explained that interest rates would need to stay at a level that restrains growth “for some time”.

The most important takeaway from the last 10 years was that central banks should be directly responsible for delivering stable and low inflation rates. Fed’s commitment on this fronts is absolute.

He also highlighted the risk of inflation becoming too high for too long and setting off a series of people expecting higher prices.

“Powell warned that the longer this period of high inflation continues, the greater the chance that inflation expectations will become ingrained.”

Financial markets started to rally as the Fed signaled that they may loosen up their efforts to cool off the economy, and investors were more optimistic about how much stimulus was necessary given the worsening economic data and risks of being too heavy-handed.

Last month, the central bank brought its rate up for the second time in a row by 0.75% to 2.25%-2.50%.

At their next meeting in September, Fed officials are considering increasing the interest rate again by the same magnitude, or alternatively slowing it down and going for a small increase.

Powell’s comments encouraged traders to change their wager on when the Federal Reserve will finally raise interest rates. As of Friday, futures contracts implied that rates would be raised as high as 3.82 per cent by next March.

It means the traders believe the central bank will keep rates high for longer, which is a new and different stance for investors. They had been unwilling to make bets about the central bank’s plans to raise interest rates in the face of slow growth.

The Fed is willing to take short-term pain in order to achieve long-term stability. Factors illustrating this are the reluctance to raise interest rates and the willingness to let inflation run up. You are unlikely to see a dovish pivot from the Fed. They want to make sure that inflation and inflation expectations are low.

Powell says it would be a good idea to slow down rate hikes at some point. But he dismissed recent data showing inflation has slowed, saying it wasn’t enough of a change to warrant a reduction in rates. “A single month’s improvement is not enough to assure us that inflation has started to decline.”

Most government officials maintain that they’ll be able to control inflation without triggering a painful recession. This is contrary to the consensus view among Wall Street economists, who predict at least a mild recession sometime in the next year.

Economists expect the US unemployment to rise over 4.1%. This is despite the FOMC members and regional bank presidents expecting it to stay below this number in June. The unemployment rate, a relatively good news story in an otherwise dark economic picture, hovers at a near-record low of 4.2%.

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