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Fighting inflation will cause pain for families: Powell

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Jackson Hole. U.S. Federal Reserve (Fed) Chairman Jerome Powell sent a clear message: the central bank is determined to fight inflation with further interest rate hikes, which will cause “some pain” to families and businesses under a weaker economy and job losses. “These are the unintended costs of reducing inflation. But not restoring price stability would bring much bigger problems,” Powell told the annual conference of central bankers.

His remarks caused stock markets to fall and Treasury yields to rise, a sign that investors expect big rate hikes and are not ruling out an economic recession in the coming months or early next year.

Central banks typically raise interest rates to try to contain inflation, which is currently at high levels in several countries. While the hikes make borrowing costs more expensive, they are aimed at slowing economic activity to bring prices down.

In its two recent monetary policy meetings, the Bank of Mexico raised its rates by three-quarters of a percentage point each time, bringing the benchmark rate to an all-time high of 8.5 percent. The measure was a parallel move to that made by the Fed, in order to avoid abrupt capital outflows from the country that could affect the peso. Deputy Governor Jonathan Heath recently indicated that the Mexican central bank will follow in the Fed’s footsteps.

In a rarely forceful statement at the annual central bankers’ conference in Jackson Hole, Wyoming, Powell warned that the U.S. economy will need tight monetary policy “for some time” before prices are under control, which will mean slower growth, a weaker labor market and “some pain” for households and businesses.

Benchmark interest rates in the United States are in the range of 2.25 and 2.5 percent. Meanwhile, inflation in the world’s largest economy is at its highest level in 40 years.

On the day of the Fed Chairman’s expected speech, it was reported that U.S. inflation moderated in July and consumer confidence improved in August.

President Joe Biden welcomed the data. “The U.S. economy is doing well, but there is still a long way to go,” he said.

Markets shaken
Powell’s speech caused sharp losses in markets globally. On Wall Street, the Nasdaq technology index fell 3.93 percent, the Standard and Poor’s was down 3.35 percent and the Dow Jones 3.01 percent. The S&P 500 posted its biggest percentage decline since June 13 and the Nasdaq its biggest since June 16.

“Today, in a single day the market in the United States lost $1.25 trillion. This is equivalent to Mexico’s annual GDP, more or less,” commented Luis Gonzalo, Investment Director of the firm Franklin Templeton Mexico.

The Mexican Stock Exchange’s benchmark index fell 0.95 percent to 47,272.11 points and accumulated a loss of 2.46 percent during the week. The peso was strengthened, and although it fell five cents (0.27 percent) to 19.98 units per dollar, it ended the week with a gain of 22 cents (1.11 percent).

 

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