Fed officials hope that inflation can be controlled without the pain of the Volcker era

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The Federal Reserve is “strongly committed” to fighting inflation and remains hopeful it can be achieved without the “very high social costs” involved in previous struggles to control prices, the Federal Reserve said on Thursday. Fed Chairman Jerome Powell.

The comments echoed those of other US central bank officials as they ponder another potentially unconscionable interest rate hike.

Powell, in a 40-minute webcast interview with Cato Institute President Peter Goettler, was not asked about the central bank’s meeting later this month, which is expected to raise its target interest rate. half or three-quarters of a percentage point.

The Fed chief did not offer any information on his preference.

However, investors in contracts linked to the Fed’s monetary policy rate are currently anticipating a 75 basis point hike, an expectation that increased after the European Central Bank raised its rate by three-quarters of a percentage point, and a decline in US jobless claims pointed to the strength of the labor market.

Also, a generally dovish Fed official indicated he was open to the idea.

The Fed “could very well” make a 75 basis point hike at its September 20-21 meeting, said Chicago Fed President Charles Evans, who has tended to be on the dovish side of policy debates. monetary.

That would mark the third big increase in a row and push the Fed’s interest rate target above 3% for the first time since 2008.

Fed policymakers’ comments on Thursday are the last before a silent period begins on the Saturday before the September meeting.

DECISION TAKEN?

The fact that Powell, in particular, did not overtly undermine the likelihood of a higher rate hike led some analysts to conclude that he had made up his mind.

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But Powell reaffirmed what has become the Fed’s message of the moment: Policymakers will not back down on planned rate hikes despite potential risks to jobs and economic growth.

“We have to act now, frankly, forcefully, as we have been doing, and we have to continue to do so until the job is done,” Powell said. “The Fed has and accepts responsibility for price stability.”

This month’s policy meeting will include updated economic projections and will almost certainly announce the fifth straight hike in the federal funds target rate.

The publication of the monthly report on consumer prices in the United States next week will be the last important data that the Fed will have to evaluate to make that decision.

While the data since the late July meeting has given a small sense that the pace of inflation may be slowing from 40-year highs, it has not been enough for them to feel confident that it has peaked.

The issue facing the Fed is how high and how fast it will need to raise credit costs to rein in the worst bout of inflation since the 1980s, and whether monetary tightening can be carried out without triggering a recession and sharp rise in unemployment, a so-called “soft landing”.

Updated Fed projections due to be released at the end of this month’s meeting will show whether officials now also see a risk of rising unemployment.

Powell said he remains hopeful it can be prevented. Evans maintained that he thought a recession would not be needed to control inflation and that the unemployment rate would only rise to perhaps 4.5%.

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Referring to former Fed Chairman Paul Volcker’s battle against inflation in the early 1980s, when the Fed’s monetary policy triggered a recession and the unemployment rate topped 10%, Powell said Volcker was trying to eliminate years of expectations of rising inflation fueling broader prices and wages.

Volcker, widely credited with winning that battle, “followed several failed attempts” by previous Fed chiefs to reduce inflation, Powell said.

“We think we can avoid the kind of very high social costs that Paul Volcker and the Fed had to bring into play” in the 1980s, Powell said.

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