Time is running out, in the face of inflation, Fed Chairman Jerome Powell warned on Thursday, justifying the need to act firmly, in order to avoid a repetition of the 1970s and 1980s, with their inflationary spiral and drastic measures to curb it
We must act firmly as we have done, and we must persevere until the job is done. To avoid this, said the president of the American central bank (Fed) at the annual monetary conference of the Cato Institute.
We think we can avoid the kind of steep social costs the Fed had to impose at the time to bring down inflation and establish a long period of price stability, he added.
The United States experienced a period of very high inflation in the 1970s, and until the beginning of the 1980s. The rise in prices had come close to 15% over one year.
Jerome Powell spoke about what Paul Volcker (Fed Chairman from 1979 to 1987, editor’s note) and the Fed did to finally bring inflation under control after several failed attempts, pointing out that the public had come to regard higher inflation as the norm and expect it to continue.
Such inflation expectations maintain the inflationary spiral, making the fight against this rise in prices even more painful.
Time is running out, warned Jerome Powell again.
He also pointed out that history warns against premature easing of monetary policy, signaling that the Fed will continue to tighten policy to slow consumption, despite recession fears.
Tight job market
The American central bank has raised its key rates four times since March, and they are now in a range of 2.25 to 2.50%.
It should raise them again on September 21, at its next meeting. Another sharp rise, of three-quarters of a percentage point, is on the table.
The European Central Bank (ECB) also acted forcefully on Thursday, raising its rates by three-quarters of a point, unheard of on this side of the Atlantic.
In the United States, inflation slowed in July, after hitting a 40-year high in June. However, it remains very high, 8.5% according to the CPI index and 6.3% according to the PCE index, the one followed by the Fed.
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CPI inflation for August will be published next Tuesday.
The Fed’s objective is to bring inflation down to 2%, a level considered healthy for the economy.
We hope for a period of below-trend (economic) growth, which will bring the labor market back into better balance, and then bring wages back to levels more compatible with 2% inflation over time, summed up the president of the Fed.
Because the job market remains very tight, with a significant shortage of workers, contributing to the increase in prices and wages.
The shock to labor supply caused by the pandemic has been large and unexpected, and unfortunately persistent, stressed Jerome Powell.