The fight against inflation in the United States “will make American households and businesses suffer, but giving it up would be even more damaging for the economy, warned Friday the head of the central bank (Fed), Jerome Powell.
In a bold and remarkably candid statement to the central bankers’ conference in Jackson Hole, Wyoming, the Fed chairman warned that the US central bank would “use its tools vigorously” by raising interest rates. interest.
Returning to price stability “will take time” and will lead to “a long period of weaker growth”, as well as “a slowdown in the labor market”, he insisted, a few months before the mid-term elections. mandate for the Democratic government of Joe Biden.
Slight dip from high inflation
Inflation in the United States pranced to 8.5% in July year on year, against 9.1% in June, a high in 40 years, according to the consumer price index CPI. According to another similar indicator very observed by the Fed, the PCE index, published on Friday, it registered at 6.3%, against 6.8% over one year.
President Joe Biden welcomed this monthly decline in inflation, ensuring that Americans were beginning to experience “relief”, thanks to “gasoline prices which have fallen every day this summer”, in a press release. But “we still have work to do,” he added.
For Mr. Powell, “while these latest declines in July are welcome, an improvement over just one month is far from sufficient” and will need to be confirmed.
The Federal Reserve wants to bring price inflation back to around 2%, and that policy will have a series of “unfortunate costs,” Powel said.
He repeated that the Fed was ready for “another exceptionally strong rate hike” at the next meeting of the Monetary Committee on September 21, after already two consecutive tightenings of 75 basis points each time.
The central banker warned the markets that interest rates would go into “restrictive” territory, ie slowing down the economy.
He also indicated that the bar of the neutral rate, which reflects the ideal level of the rates, generally evaluated around 2.5%, to create neither overheating nor to cool the economy, was hardly topical any more for the instant.
Mr Powell admitted “that at some stage it will be appropriate to slow down the pace of rate hikes”. But he added a caveat to this notion already reported, which had delighted the financial markets recently.
“History shows that we must be careful not to relax monetary policy too soon,” he warned, in this message that he wanted “direct”.
The legacy of predecessor Volcker
Like every year, but this time even more so, the speech of the leader of the most powerful central bank was the center of attention at the Jackson Hole symposium, face-to-face for the first time since 2019.
Mr. Powell acknowledged that “the current inflation was a global phenomenon and that many economies around the world were facing a price increase equal to or even higher than that of the United States”.
To cool overheated prices, since last spring the Federal Reserve has pushed overnight rates, which influence all other credit, from zero to a range between 2.25% and 2.50%.
Several times in his statement, Powell cited an illustrious predecessor as central banker, Paul Volcker, who was credited with taming runaway inflation in the early 1980s.
“It was a ‘hawkish’ speech,” summed up Paul Ashworth, an economist for Capital Economics, referring, in the language of central bankers, to the clan of supporters of a firm monetary policy that focuses first on inflation. , unlike the “doves”, more concerned about the unemployment rate.
“Not a crumb for the doves!” added Ian Shepherdson of Pantheon Macroeconomics.
On the markets, the dollar, which had weakened significantly at first after the intervention of the boss of the Fed, stabilized around 4:15 p.m. GMT (12:15 p.m. in Quebec) at exact parity with the euro at 1 dollar for 1 euro (+0.22% for the euro).
On Wall Street, the three indices suffered the blow in front of the firm tone of the Fed, the idea of a more expensive cost of money with the rise in the rates weighing on the prospects for financing and results of the companies, in particular in the technology sector. The Dow Jones index dropped 1.84%, the technology-dominated Nasdaq plunged 2.83% and the S&P 500 2.15%.