Fed Chair Signals More Rate Increases Ahead, Shaking Wall Street

JACKSON, Wyo. — Jerome H. Powell, the chair of the Federal Reserve, delivered a sobering message on Friday, saying the Fed must continue to raise interest rates — and keep them elevated for a while — to bring the fastest inflation in decades back under control.

The central bank’s campaign is likely to come at a cost to workers and overall growth, he acknowledged; but he argued that not acting would allow price increases to become a more permanent feature of the economy and prove even more painful down the road.

Stock prices plunged in the wake of Mr. Powell’s comments, as investors digested his stern commitment to raising rates and choking back inflation even if doing so damages growth and causes unemployment to rise. The S&P 500 fell 3.4 percent, its worst daily showing since mid-June, and investors in bonds began to bet that the central bank will raise rates by more than they had been expecting.

Mr. Powell’s full-throated commitment to defeating inflation began to put to rest an idea that had been percolating among investors: that the central bank might lift rates slightly more this year but then begin to lower them again next year. Instead, the Fed chair echoed many of his colleagues in arguing that rates will need to go higher, and will need to stay in economy-restricting territory for a while, until inflation is consistently coming down.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” Mr. Powell said in a speech on Friday. “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.”

He then added: “These are the unfortunate costs of reducing inflation.”

Mr. Powell was speaking at the Federal Reserve Bank of Kansas City’s annual conference near Jackson, Wyo., in a speech that is typically his most closely watched appearance of the year. That prominent platform gave him an opportunity to clearly signal the Fed’s commitment to wrestle inflation lower to markets and the public, which he did in his terse and to-the-point eight-minute speech.

“The process won’t be painless, and I think he’s being more upfront about that,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research. “The likelihood of recession is rising, because that’s the solution to the inflation problem — that’s what they’re telling you.”

While central bankers have spent much of the past year saying they hope to set the economy down gently — and not tip it into recession — Mr. Powell’s remarks made it clear that a bumpy landing would be a price worth paying to return price stability to the United States.

The Fed has lifted interest rates from near zero in March to a range of 2.25 to 2.5 percent, and investors have been waiting for any hint at how fast and far the Fed will raise rates in coming months. Higher interest rates make it more expensive to borrow money to build a house or expand a business, slowing economic activity and cooling down the job market. That can eventually help reduce demand enough that supply catches up and price increases slow down.

Mr. Powell did not say what pace lies ahead, suggesting that Fed officials will watch incoming data as they decide whether to make a third straight “unusually” large three-quarter-point rate increase at their Sept. 20-21 meeting. He reiterated that the Fed was likely to slow its increases “at some point,” but he also said central bankers had more work to do when it came to constraining the economy and bringing inflation back under control.

The current level of interest rates is “not a place to stop or pause,” the Fed chair said, adding that rates will probably need to stay high enough to meaningfully weigh on the economy for “some time,” and that the “historical record cautions strongly against prematurely loosening policy.”

The upshot was clear: The Fed is nowhere near declaring victory. While Mr. Powell greeted a slowdown in inflation in July as good news, he said it was not enough to determine that the Fed’s mission was on its way to being accomplished.

“Lower inflation readings for July are welcome, a single month’s improvement falls far short of what the committee will need to see before we are confident that inflation is moving down,” he said, referring to the policy-setting Federal Open Market Committee.

The Fed’s preferred inflation gauge, the Personal Consumption Expenditures index, climbed 6.3 percent over the year through July, a slowdown from the prior month but still far above the 2 percent average that the Fed shoots for. Price increases are showing hopeful signs of waning for some types of goods, but much of the recent slowdown has been driven by a pullback in fuel prices, which are volatile.

“It’s really premature to even think that inflation has peaked,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said during an interview on Yahoo Finance on Friday. “The July inflation report had some positives, it was welcome news, but it was based on, basically, a downturn in energy prices, and we know they’re volatile.”

Central bankers want to see more evidence that inflation is cooling before they will feel confident that it is headed in the right direction. That’s especially true because job gains and wage increases remain strong, suggesting that the economy still has substantial underlying momentum.

Mr. Powell also used his key speech to lay out a set of reasons that the central bank must remain dedicated to lowering inflation even if its push causes pain in the short term. It was a message seemingly pointed both at the Fed’s critics and at the general public, as Americans everywhere grapple with rapidly rising costs.

Inflation is a global phenomenon caused partly by a shortage of goods, thanks to pandemic-era factory closures in Asia and snarled supply chains. Politicians including Senator Elizabeth Warren, Democrat of Massachusetts, have argued that the Fed’s tools are a painful way to bring down rising costs. But Mr. Powell made it clear in his remarks that there is work to do on cooling demand — which is what the Fed’s tools can do.

“Central banks can and should take responsibility for delivering low and stable inflation,” Mr. Powell said. “Our responsibility to deliver price stability is unconditional.”

He said it was critical to work to stamp out inflation before the public began to expect it, because such expectations can change behavior in ways that lock in rapid price increases.

“Inflation has just about everyone’s attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” Mr. Powell said.

The cost of entrenched inflation could be high. Once fast price increases become a more permanent feature of the economy, they would probably become much harder to crush, requiring more economic pain in the form of lost jobs and household suffering to choke off demand.

“History shows that the employment costs of bringing down inflation are likely to increase with delay,” Mr. Powell said. “Our aim is to avoid that outcome by acting with resolve now.”

The overarching signal from Mr. Powell’s remarks is that he and his colleagues are dedicated to wrestling inflation lower, even if that effort is a painful one. The final line of his speech even seemed like it might allude to his long-ago predecessor, Paul Volcker, who raised rates sharply in the 1980s to choke down inflation and who detailed his campaign against rapid inflation in an autobiography, “Keeping at It,” published in 2018.

“We will keep at it until we are confident the job is done,” Mr. Powell said.