Jerome Powell Warns That War on Inflation May Be Painful

JACKSON, Wyo. — Jerome H. Powell, the chair of the Federal Reserve, warned that the central bank’s campaign to wrestle lower the fastest inflation in decades will come at a cost to workers and overall growth. But he emphasized that the Fed must stick with its policy of raising interest rates to prevent rapid price increases from becoming a more permanent feature of the American economy.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” Mr. Powell said in a speech on Friday. “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.”

He then added: “These are the unfortunate costs of reducing inflation.”

Mr. Powell, who was speaking at the Federal Reserve Bank of Kansas City’s annual conference near Jackson, Wyo., used his most closely watched speech of the year to underline both the Fed’s dedication to bringing inflation back under control and to emphasize that its policy moves so far are not enough to achieve that goal — more will need to be done to beat back rapid price increases.

The Fed chair’s comments sent a clear signal that the central bank remains resolute in fighting inflation and does not plan to deviate from its plan to slow the economy anytime soon. Central bankers have spent much of the past year saying that they hope to set the economy down gently, but Mr. Powell’s remarks made it clear that a bumpy landing would be a price worth paying to return price stability to the United States.

The Fed has lifted interest rates from near-zero in March to a range of 2.25 to 2.5 percent, and investors are waiting for any hint at how fast and far the Fed will raise rates in coming months. Higher interest rates make it more expensive to borrow to build a house or expand a business, slowing economic activity and cooling down the job market, which can eventually help to reduce demand enough that supply catches up and price increases slow down.

Mr. Powell did not give a clear signal of what pace lies ahead, suggesting that Fed officials will be watching incoming data as they decide whether to make a third straight “unusually” large three-quarter point rate increase at their Sept. 20-21 meeting. But he made it clear that central bankers have more work to do when it comes to constraining the economy and bringing inflation back under control.

The current level of interest rates is “not a place to stop or pause,” the Fed chair said, though he also reiterated that “at some point, as the stance of monetary policy tightens further, it is likely to become appropriate to slow the pace of increases.”

Mr. Powell greeted a slowdown in inflation in July as good news, but not enough to determine that the Fed’s mission is on its way to being accomplished.

“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, referring to the policy-setting Federal Open Market Committee.

The Fed chair used his platform — the most important speech at what is arguably the most important economic conference of the year — to lay out a clear set of reasons for why the central bank must remain dedicated to lowering inflation even if its push causes pain in the short term. It was a message seemingly pointed both at the Fed’s critics and at the general public, as Americans everywhere grapple with rapidly rising costs.

Inflation is a global phenomenon caused partly by constrained supply, thanks to pandemic-era factory closures in Asia and snarled supply chains. Politicians including Senator Elizabeth Warren, Democrat of Massachusetts, have argued that the Fed’s tools are a painful way to bring it down. But Mr. Powell made it clear in his remarks that there is work to do on cooling demand — which is what the Fed’s tools can do.

“Central banks can and should take responsibility for delivering low and stable inflation,” Mr. Powell said. “Our responsibility to deliver price stability is unconditional.”

The Fed chair said that it was critical to work to stamp out inflation before the public begins to expect it, because such expectations can change behavior in ways that lock in rapid price increases.

“Inflation has just about everyone’s attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” Mr. Powell said.

The cost of entrenched inflation could be high. Once fast price increases become a more permanent feature of the economy, they would probably become much harder to crush, requiring more economic pain in the form of lost jobs and household suffering to choke off demand.

“History shows that the employment costs of bringing down inflation are likely to increase with delay,” Mr. Powell said. “Our aim is to avoid that outcome by acting with resolve now.”

The overarching signal from Mr. Powell’s remarks is that he and his colleagues are dedicated to wrestling inflation lower, even if that effort is a painful one. The final line of his speech even seemed like it might allude to his long-ago predecessor, Paul Volcker, who raised rates sharply in the 1980s to choke down inflation and who detailed his campaign against rapid inflation in an autobiography titled “Keeping at It,” published in 2018.

“We will keep at it until we are confident the job is done,” Mr. Powell said.