Powell: "Restrictive Policy for the Time Being... Rate Hikes to Continue Despite Pain"

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Jerome Powell, Chair of the U.S. Federal Reserve (Fed), reaffirmed on the 26th (local time) the tightening policy to maintain a high level of the benchmark interest rate to curb inflation. While expressing concerns about the economic repercussions of tightening, he prioritized inflation control, stating, "Failing to stabilize prices will inevitably lead to greater pain." There was no specific mention of the future rate hike magnitude, which has been the focus of market attention.

In his speech at the economic policy symposium "Jackson Hole Meeting," hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, Powell stated, "We will strongly use our tools to suppress inflation."

Despite the Fed's consecutive rate hikes totaling 2.25 percentage points this year, Powell emphasized the tightening stance by saying, "There is no place to stop." He also said, "We need to maintain a restrictive stance for the time being."

He said, "High interest rates, slow growth, and a loose labor market will bring down inflation but will cause some pain to households and businesses," adding, "Unfortunately, reducing inflation comes with a cost." He further added, "Failing to restore price stability means greater pain."

This reconfirms the policy of deliberately sustaining high interest rates to the extent that it slows the economy somewhat in order to curb inflation, and the willingness to bear this. It also indicates a commitment to achieving the 2% target without being swayed by the recently spreading inflation peak theory in the market.

As initially expected by investors, there was no specific mention of the size of the September rate hike. The speech ended within a short 10 minutes compared to previous years. Regarding the recently spreading inflation peak theory, Powell welcomed the July figures but assessed, "There is no certainty or evidence that inflation is declining." He also added, "At some point, the pace of rate hikes will slow."

The Jackson Hole Meeting, which opened the day before, was held face-to-face for the first time in three years due to the pandemic. It is a gathering where central bank governors, finance ministers, and economic scholars from various countries, including Lee Chang-yong, Governor of the Bank of Korea, come together to discuss the direction of global economic policy. Especially amid soaring inflation at the highest level in 40 years, high-intensity tightening, and concerns about growth slowdown, attention was focused on Powell's speech leading U.S. monetary policy.

Powell's speech is evaluated as more hawkish than expected. On the morning of the speech, the Dow Jones Industrial Average and the S&P 500 index in the New York stock market were down more than 1%. The Nasdaq index, centered on tech stocks, was down nearly 2%.

However, the possibility of a third consecutive giant step (0.75 percentage point rate hike) in the interest rate futures market has slightly decreased. According to the Chicago Mercantile Exchange (CME) FedWatch, the current federal funds (FF) rate futures market reflects a 54.4% probability that the Fed will raise rates by 0.75 percentage points in September, down from 64% the previous day.

This is interpreted as influenced by inflation indicators released before Powell's speech.

The inflation indicator mainly referenced by the Fed showed a slowdown in the surge. According to the U.S. Department of Commerce, the July Personal Consumption Expenditures (PCE) price index released that day fell 0.1% from the previous month. This is the first time the PCE price index has fallen month-on-month since April 2020, early in the pandemic. Compared to the same month last year, it rose 6.3%, but the increase slowed compared to June. This is analyzed as reflecting the decline in energy prices such as gasoline.

Raphael Bostic, President of the Federal Reserve Bank of Atlanta, said in a CNBC interview that he is "slightly leaning" toward a 0.5 percentage point rate hike next month.

This content was produced with the assistance of AI translation services.