Interest Rates Will Rise Until Inflation Is Under Control, Fed Chairman Powell Says: NPR

Federal Reserve Chairman Jerome Powell has pledged that he and his colleagues will continue to raise interest rates until they are confident inflation is under control.



ARI SHAPIRO, HOST:

In Jackson Hole, Wyo., popular summer activities include horseback riding, rafting and, this week, fighting inflation. Federal Reserve Chairman Jerome Powell was the star attraction this morning at an annual economic conference. He delivered a short but forceful speech in which he promised interest rates would rise and stay until Fed policymakers were confident prices were back in check. The speech sparked a strong sell-off on Wall Street, where the Dow Jones Industrial Average fell more than a thousand points. NPR’s Scott Horsley followed all of this. Hi Scott.

SCOTT HORSLEY, BYLINE: Hello, Ari.

SHAPIRO: There was a lot of anticipation for Powell’s speech today. What did he say?

HORSLEY: Well, he was very direct. He said the Federal Reserve had an unconditional responsibility to bring inflation down to 2%, and that he and his colleagues planned to do so even if it caused short-term hardship. The Fed’s No. 1 tool to fight inflation is to raise interest rates. This dampens demand and drives down prices. But Powell acknowledged there can be a human cost to that, including higher unemployment and more sluggish economic growth.

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JEROME POWELL: While higher interest rates, slower growth and less favorable labor market conditions will bring down inflation, they will also cause hardship for households and businesses. These are the unfortunate costs of reducing inflation, but a failure to restore price stability would mean far greater pain.

HORSLEY: The Fed has already raised interest rates by 2 1/4 percentage points since March, and Powell says that to really dampen demand, rates are going to have to go even higher. He gave no indication today as to whether rates will rise by half a point or three-quarters of a point at the Fed’s next meeting in September. He just reiterated that he and his colleagues will be watching incoming economic data and are ready to make adjustments based on what those numbers show.

SHAPIRO: So interest rates go up, and then what?

HORSLEY: Well, Powell says interest rates are likely to stay high for some time to come. This shouldn’t come as a big surprise – the Fed’s projections showed rates to stay high at least through the end of next year – but some investors were apparently betting that the Fed could snuff out inflation quickly, then start lowering rates again. Powell poured cold water on this idea.

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POWELL: Restoring price stability will likely require continued tight policy for some time. The historical record strongly cautions against premature policy easing.

HORSLEY: And that obviously disappointed some investors. The shares fell sharply. The Dow, as you mentioned, fell over 3%. The tech-heavy Nasdaq, which is particularly sensitive to interest rates, fell nearly 4%.

SHAPIRO: There was some positive inflation news from the Commerce Department today. What does it show?

HORSLEY: Yes, the Commerce Department’s inflation indicator, which is closely watched by the Fed, actually showed that consumer prices fell between June and July, thanks in part to lower prices for gasoline. If you take out food and energy, which are rebounding a lot, core prices only rose a tenth of a percent last month, and annual core inflation in July was actually the lowest since nine months, so that’s encouraging. Powell called it a welcome development, but he also warned that he and his colleagues will need to see more than a month’s improvement before they are ready to celebrate.

SHAPIRO: The Fed Chairman said he relied on the historical record here. So what does history tell us?

HORSLEY: Yeah, Powell talked a bit about the 1970s, when policymakers really let inflation spiral out of control for a long time — so long, in fact, that people came to expect prices continue to increase. This made it even more difficult to turn the tide. When former Fed Chairman Paul Volcker finally cracked down, it took a very deep recession to bring inflation under control.

Now, that’s not where we are right now. High inflation is still a relatively recent problem. It’s not ingrained in people’s minds yet. That’s why Powell and his colleagues are so keen to control prices now, before too much extra time passes.

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POWELL: Of course, inflation is getting pretty much everyone’s attention right now, which highlights a particular risk today. The longer the current episode of high inflation lasts, the more likely higher inflation expectations are to persist.

HORSLEY: Powell’s message is that it’s best to grit your teeth now and deal with the fallout from those higher interest rates. If you don’t control inflation, he says, the economy won’t work for anyone.

SHAPIRO: NPR’s Scott Horsley. Thanks.

HORSLEY: You’re welcome.

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