Economic Watch: "Some pain" ahead as U.S. Fed set to continue rate hikes-Xinhua

Economic Watch: "Some pain" ahead as U.S. Fed set to continue rate hikes

Source: Xinhua| 2022-08-27 16:42:00|Editor:

by Matthew Rusling

WASHINGTON, Aug. 27 (Xinhua) -- U.S. Federal Reserve head Jerome Powell on Friday said there will be "some pain" ahead as the central bank struggles to get surging inflation under control with interest rate hikes.

In his annual policy address, the Fed chief vowed that the central bank would "use our tools forcefully" to tamp down crippling inflation, which is near its highest point in over four decades.

Powell said heightened interest rates would continue "for some time," noting that "the historical record cautions strongly against prematurely loosening policy."

Brookings Institution Senior Fellow Barry Bosworth told Xinhua, "It was a tough speech with a clear focus on inflation. Continued tightening of policy with rate increases,"

For Desmond Lachman, resident fellow at the American Enterprise Institute, "Jerome Powell's Jackson Hole speech was somewhat more hawkish" than anticipated.

"Mr. Powell emphasized that it was important that the Fed keep inflation expectations well anchored and that it must maintain its restrictive monetary policy stance until the job of reducing inflation was done," Lachman said.

Dean Baker, senior economist at the Center for Economic and Policy Research, told Xinhua that Powell "obviously is trying to say that he is prepared to take strong action against inflation, at the price of higher unemployment."

"It is very worrying since recent data indicate a slowing of inflationary pressures," said Baker.

The Fed has implemented four back-to-back rate hikes totaling 2.25 percentage points, but Powell said that's "no place to stop or pause" with inflation running far above 2 percent and the labor market extremely tight.

"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," the Fed chief said.

"These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain," he added.

Lachman said he fears that "by continuing to aggressively raise interest rates at a time of incipient domestic economic weakness at home and of a brewing perfect economic storm abroad, the Fed would seem to be inviting a hard U.S. economic landing."

While unemployment stands at historic lows, the housing sector is slowing, and many economists predict the labor market will cool.

Still, the Fed head stopped short of saying exactly what would happen next and whether the bank would raise, maintain or cut interest rates.

Powell noted that the Fed would continue to monitor incoming data before the September meeting. "However, he certainly left open the likelihood that the Fed would hike interest rates by another 75 basis points," Lachman said.

According to the Chicago Mercantile Exchange Group's FedWatch tool, the probability of a 75-basis-point rate hike at the Fed's next policy meeting was 61 percent as of Saturday.

With the midterm elections just months away, many Americans have their eye on the Fed.

Brookings Institution Senior Fellow Darrell West told Xinhua that people "pay a lot of attention to rates because it affects their ability to buy homes and cars."

Government data released last week showed that U.S. housing starts in July plunged by 9.6 percent, indicating a cooling housing market amid rising rates and elevated inflation.

What the Fed decides "has big consequences for ordinary individuals and the lifestyle they are able to pursue," West said. "Voters don't enjoy rate increases but realize they are vital to getting inflation under control."

Clay Ramsay, a researcher at the Center for International and Security Studies at the University of Maryland, told Xinhua that attitudes toward the Fed relate to whether the public experiences the economy as working relatively well for the average person.

A National Association for Business Economics survey released Monday showed that some 73 percent of panelists indicate they are "not very confident" or "not at all confident" that the Fed will be able to bring inflation down to its 2 percent goal within the next two years without triggering a recession.

The survey showed that roughly one-fifth of panelists believe the United States is already in a recession, while 47 percent expect a recession to begin by the end of 2022 or the first quarter of 2023.