Why the Fed plans to keep aggressively fighting inflation even if it leads to job loss

Amna Nawaz:

Well, the chairman of the Federal Reserve delivered a stark message today on the long fight ahead against inflation. Jay Powell warned that more interest rate hikes are coming and said they're going to take a toll.

Stocks dropped sharply after his comments.

William Brangham has the details.

William Brangham:

That's right, Amna.

With inflation still at a 40-year high, Chairman Powell today pledged that the Central Bank is not backing down on its campaign to curb inflation. Powell spoke at the Fed's annual economic symposium in Jackson Hole, Wyoming. And, for a Fed chairman, he was pretty direct.

Jerome Powell, Federal Reserve Chairman:

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.

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

William Brangham:

Those comments clearly rattled the markets, triggering a sharp sell-off.

The Dow Jones industrial average plunged 1,008 points to close at 32283. That's down 3 percent. The Nasdaq fell 497 points, about 4 percent. And the S&P 500 shed 141. That's 3 percent.

To help put this all into perspective, I'm joined again by David Wessel. He's the director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.

David, great to have you back on the "NewsHour."

So, pretty strong message from Powell today: We are not going to stop this fight, meaning interest rates are not coming down anytime soon. Were you surprised at what he had to say today?

David Wessel, Brookings Institution:

I was not surprised by the basic message, but the tone was very sharp.

The chairman said he was going to be direct, and he was. His speech was shorter than the ones he has given in the past. And I think he was trying to send a strong signal that fighting inflation is their top priority. It means that unemployment probably will get worse, and that is not going to shake them from their resolve.

William Brangham:

I want to get to that in a moment.

But the sharp sell-off that we saw in the market today indicates that the market didn't seem to think this is the tack that Powell was going to take.

David Wessel:

Yes, it is always hard to explain why the market does on a given day — and who knows, Monday, the market may be up.

But there has been a disconnect between the market and the Fed. The market or many people in the market have been thinking that the Fed is basically winning the war, the economy is slowing, they're going to raise rates again this year, but, by next year, they will be cutting them.

And Powell sent a very strong message: We are not going to be cutting rates next year. We are going to raise rates, and we're going to keep them high until we have really wrung inflation out of the economy.

William Brangham:

It may be self-evident to economists out there, but walk us through the pain of what that could mean.

Powell mentioned that word a few times, which I know is always little hair-raising when a Fed chief mentions that. What does this mean for average consumers?

David Wessel:

Well, I think you have to give Jay Powell some credit. He's not pretending this is all going to be easy. And that's sometimes — sometimes, some politicians and central bankers do pretend.

What he is saying is, we're going to raise interest rates. We know that that will make it harder for businesses and consumers to borrow. They will spend less. And if they spend less, some people are going to lose their jobs. That's basically what he's saying.

And he's saying, I know that sounds bad and, he didn't say this, but maybe we should have acted earlier. Remember, a year ago, he gave a speech telling us why we didn't have to worry about inflation. But his case is and the common central banker case is, if we take a little pain now, we can avoid more pain down the road.

William Brangham:

Meaning inflation, if left unchecked, gets worse and/or becomes locked in place.

David Wessel:

And then the Fed will raise interest rates a lot, as it did in the early '80s, and we will have a really deep recession.

The Fed is hoping — inflation is — has eased a little bit. Actually, the measure that the Fed watches did not increase at all from June to July, which is a good sign. And he mentioned that, but he says it's not enough.

The Fed is hoping that inflation will come down gradually as the supply chains work their way — work out the kinks in the supply chains. And then they will squelch demand enough, so that we can have what they like to call a soft landing. That is, the economy will slow, unemployment will go up a little bit, but it won't be a recession.

But he's not promising that. And I don't think he should promise it.

William Brangham:

You mentioned this. We have seen some decent inflation news and some other encouraging growth on durable goods and job claims.

For someone who's, again, not terribly well-versed in the economy more broadly, where is this economy? Are we in trouble, or are things looking up?

David Wessel:

Things are really confusing.

One economist I know says, if you're not a little confused, you're not paying attention.

(LAUGHTER)

David Wessel:

The job market has been extraordinarily strong, hundreds of thousands of new jobs each month. The unemployment rate is still very low. And we have this high inflation rate. And there are some signs that the economy is slowing.

According to the most recent government estimates, the economy actually contracted in the first couple of quarters. But, basically, what's happening is, the economy ran — is running a little bit out of steam. And we expect that job growth will not continue. We expect that unemployment will go up. And we expect that means that consumers, some of whom are squeezed because their wages aren't going up as much as prices are going up, will spend less.

And that will gradually slow the economy. The Fed chair talked about below-trend growth. That means growth so slow that unemployment goes up, but not so slow that we have a recession.

William Brangham:

So this fall is the next Fed meeting. Do you expect half-inch, quarter-point?

David Wessel:

Half-inch?

William Brangham:

Half…

(LAUGHTER)

William Brangham:

Half-a-point, quarter-point?

David Wessel:

So, I don't really know.

There's a lot of speculation about whether they will raise rates another half-percentage point or three-quarters-of-a-percentage point. The markets today concluded, based on Jay Powell's adverbs, that three-quarters is more likely. But we will get some more inflation numbers and some more jobs numbers between now and the September meeting.

What really matters is, how far will they take rates up? And both the Fed and financial markets are expecting another full percentage point of rate increases before the end of 2022. The disagreement is what happens after that.

William Brangham:

David Wessel of the Hutchins Center, thanks so much.

David Wessel:

You're welcome.