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Fed chief Powell hints at more big interest rate hikes to avoid 'greater pain' of high inflation

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Fed Chairman Jerome Powell said on Friday that his agency will keep making sizable interest rate hikes until the data show that hot-running inflation has cooled. File Photo by Tasos Katopodis/UPI | <a href="/News_Photos/lp/c61ede49bbf95825aa638d50ceb7c02b/" target="_blank">License Photo</a>
Fed Chairman Jerome Powell said on Friday that his agency will keep making sizable interest rate hikes until the data show that hot-running inflation has cooled. File Photo by Tasos Katopodis/UPI | License Photo

Aug. 26 (UPI) -- In highly anticipated remarks on Friday, Federal Reserve Chairman Jerome Powell spoke at a symposium in Wyoming and aimed to make one economic point extremely clear -- the Fed will keep hiking interest rates until inflation returns to a healthy level.

The eyes of analysts, economists, investors and many Americans were on the symposium in Jackson, Wyo., to get some idea of what the Fed's near-term plans are for dealing with inflation that's been at historic highs in recent months.

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The Jackson Hole Economic Symposium has come to be an important event on the economic calendar.

"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," Powell said in his speech. "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

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"Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy," he added. "Without price stability, the economy does not work for anyone.

"The burdens of high inflation fall heaviest on those who are least able to bear them."

Many across the economic spectrum were looking for insight into how the central bank will keep fine-tuning key interest rates for the rest of 2022 and into 2023. Powell made clear on Friday that the chief tool will be ordering higher interest rates, which limits consumer spending and brings inflation down.

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The Fed has raised rates by substantial and historic increments at its last three policy meetings -- a half-point hike in May and a pair of 0.75% hikes in June and July. The next decision will come on Sept. 21, and there will be two more meetings in November and December.

Although inflation is still running high on a year-to-year basis, there have been signs recently that the Fed's moves may finally be having an impact on rising prices. The retail spending report this month showed no increase in July and a key index also showed no increase in consumer prices last month.

President Joe Biden signs the Inflation Reduction Act -- a $737 billion law focused on slowing climate change, lowering healthcare costs and controlling rising prices -- at the White House in Washington on August 16. Photo by Bonnie Cash/UPI
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The biggest driver of inflation over the past year -- energy prices -- are also cooling. Gas prices in the United States have come down by almost 50 cents per gallon over the last month, and $1.15 per gallon since the national average reached its record peak of $5.02 in the middle of June. The average Friday was $3.87 per gallon, according to AAA.

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Powell said that while those were welcome signs, they are not enough for the Fed to call off its run on interest rates.

"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, hinting at another "unusually large hike" at the Fed's meeting this month.

At last year's symposium, when the fiscal threat of COVID-19 still loomed large, Powell said a key goal was boosting creation of U.S. jobs -- which is often good for the economy, but can also help push up inflation. In 2020, he said the Fed would support broad market goals even though that also might bring higher inflation.

Last year in Jackson, Powell tried to strike an optimistic chord by saying that higher prices would probably be temporary -- only to see a sustained surge in inflation over the next 11 months at a level not seen in the United States for four decades. The Fed's moves in 2022 have been much more aggressive.

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The futures market anticipates that the Fed will raise interest rates by 0.75% for the third month in a row at its September meeting as the federal funds rate is presently in a range of 2.25%-2.5%, which is still shy of the Fed's targeted end rate of 3.5% to 3.75% by the first quarter of 2023.

"The challenge for Powell is going to be the tone he adopts. I think he came across as slightly too dovish, not hawkish enough in July," David Page, head of macroeconomic research at AXA Investment Managers, said, according to CNBC. "I think he wants to avoid that now, with markets expecting him to be relatively hawkish."

Powell reminded Wall Street that its action is rooted in fluid economic data -- such as the August jobs report next week and the latest Consumer Price Index, the government's top inflation gauge, on Sept. 13.

Markets surged after the Fed's July policy meeting and staged a rebound in the two days leading up to Powell's remarks.

Page noted that Powell would probably prefer to avoid another stock market rally and a decrease in bond yield that would signal financial conditions are loosening.

"The difficulty he will have is there's already quite an expectation that he's going to be quite hawkish," he told CNBC. "So he has to be at least quite hawkish for that rally not to happen."

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