Powell pledges to prevent inflation from settling in the long term

U.S. Federal Reserve Board Chairman Jerome Powell testifies before a House Financial Services Committee hearing in Washington, U.S., June 23, 2022.

Mary F. Calvert | Reuters

Federal Reserve Chairman Jerome Powell vowed on Wednesday that policymakers would not let inflation grip the U.S. economy longer term.

“The risk is that due to the multiplicity of shocks, you start to move to a regime of higher inflation. Our job is literally to prevent that from happening, and we will prevent that from happening,” he said. said the head of the central bank. “We will not allow a transition from a low inflation environment to a high inflation environment.”

Addressing a European Central Bank forum with three of his global counterparts, Powell continued his tough talk on U.S. inflation, which is currently at its highest level in more than 40 years.

In the short term, the Fed has instituted several rate hikes in an attempt to rein in rapid price increases. But Powell said it’s also important to stop longer-term inflation expectations, so they don’t take root and create a self-fulfilling cycle.

“There is a ticking clock here, where inflation has been ticking now for over a year,” he said. “It would be bad risk management to simply assume that these long-term inflation expectations would remain anchored indefinitely in the face of persistently high inflation. So we’re not doing that.”

Since the Fed started raising rates in March, market indicators of inflation expectations have fallen significantly. A five-year outlook measure that compares inflation-linked government bonds to standard Treasuries has fallen from nearly 3.6% at the end of March to 2.73% this week.

However, other surveys show that consumers expect prices to continue to rise. One such move, from the University of Michigan, helped pressure the Fed to raise its benchmark interest rate by 0.75 percentage points at its meeting earlier this month.

The Fed is now tasked with lowering those expectations without collapsing the economy. Powell said he was confident it would happen, although he acknowledged the risks ahead.

“We are firmly committed to using our tools to bring down inflation. The way to do that is to slow growth, ideally by keeping it positive,” he said. “Is there a risk of going too far? Certainly there is a risk. I would disagree that this is the biggest risk to the economy. The biggest mistake to make … would be to fail to restore price stability.”

Powell pledges to prevent inflation from settling in the long term

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