Fed’s Powell optimistic inflation can be tamed without Volcker-era pain Reuters

© Reuters FILE PHOTO: Federal Reserve Board Chairman Jerome Powell attends a news conference following the two-day meeting of the Federal Open Market Committee (FOMC) in Washington, U.S., July 27, 2022. REUTERS/Elizabeth Franz

By Howard Schneider and Ann Safire

WASHINGTON (Reuters) – The Federal Reserve is “strongly committed” to fighting inflation, but there is hope that it can be done without the “too high social costs” of previous campaigns to control high inflation, Fed Chairman Jerome Powell said on Thursday.

In a 40-minute webcast interview with Cato Institute President Peter Goettler, Powell was not asked about the U.S. central bank’s policy meeting later this month, which is expected to raise its target interest rate by half or three-quarters of a percent. score, and the head of the federation did not volunteer any information on the election.

Investors in contracts tied to the Fed’s policy rate currently expect the largest 75-basis-point hike, a day after the European Central Bank raised its policy rate by three-quarters of a percentage point and a drop in weekly jobless claims in the U.S. indicated continued strength in the labor market.

But Powell reiterated what has been the Fed’s message this season: policymakers are not backing down on planned rate hikes.” We have to work hard now, obviously, as we have been doing, and we have to keep going until then. “The job is done,” Powell said. “The Fed takes responsibility for price stability and accepts it.”

“My colleagues and I are committed to this project and will continue until the work is completed.”

The Fed will hold its next policy meeting on September 20-21, when it will update its economic forecasts and almost certainly announce a fifth consecutive increase in the federal funds rate. Next week’s release of the monthly U.S. consumer inflation report will be the last major piece of data policymakers will evaluate as they make that decision.

Data from the Fed’s July 26-27 meeting gave policymakers a sense that the rate of inflation may be slowing for the first time in 40 years, but not enough to give them confidence that it has peaked.

For the labor market, the Atlanta Fed’s wage tracker showed earnings continued to grow at a 5.7% annual rate through August, which some policymakers felt was inconsistent with the Fed’s 2 percent inflation target.

In addition to market-based expectations, many economists are expecting a 75-basis-point hike this month. Economists at Jefferies and Nomura followed Goldman Sachs (NYSE: ) economists on Wednesday in revising their earlier view that the Fed would cut rate hikes to a half-percentage-point after higher hikes in June and July.

“The United States is in the luxury of a continued strong labor market … there is a very good chance that the Fed will be able to lower inflation without triggering a deep recession,” said Oliver Purche, senior vice president at Wellspear Advisors in New York. “The economy and the labor market could take a 75-basis-point hike.”

Volker’s shadow

The issue facing the Fed is how much and how quickly to control inflation, the worst since the 1980s, and whether monetary tightening can be done without triggering a recession and a sharp rise in unemployment. The so-called “soft landing”.

But new research suggests that the optimistic scenario may not be achievable, with the unemployment rate doubling from its current 3.7 percent, which would allow inflation to drop in real terms.

The updated federal forecasts, due out at the end of this month’s policy meeting, will show if officials now see a risk of rising unemployment.

Powell said he remains hopeful he can be removed.

In the early 1980s, former Fed Chairman Paul Volcker pointed out that when the Fed’s anti-inflation policy triggered a recession and the unemployment rate hit 10 percent, Volcker was trying to reverse years of rising inflation and wage inflation.

Volcker, widely credited with winning that battle, “followed many failed attempts” by previous Fed leaders to lower inflation, Powell said.

Powell said inflation expectations this time around were largely based on the central bank’s 2% target, so the results could be better.

“We think we can avoid the very high social costs that Paul Volcker and the Fed had to bring into play in the 1980s,” Powell said.

But his colleagues said in recent comments that the Fed’s focus will remain on price control even as unemployment starts to rise more than expected.

“History warns against a premature policy,” he said.

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