After interest rate warning, U.S. stock markets tumble — Transcontinental Times

UNITED STATES: To prevent inflation from becoming a persistent feature of the U.S. economy, the bank’s president, Jerome Powellsaid the bank must continue to raise interest rates.

Markets fell 3% on his statements, sending US stocks into a tailspin. This happens when the prices of basic necessities rise for Americans. The world’s largest economy is experiencing its highest inflation rate in four decades.

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In a much-anticipated speech at a conference in Wyoming on Friday, Powell said the Federal Reserve could keep interest rates high “for a while” and would likely impose additional rate hikes in the months ahead.

He said at the Jackson Hole meeting that “Reducing inflation will likely require an extended period of below-trend growth.”

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Investors fear that if economic growth slows, rising interest rates will make recession more likely.

Powell acknowledged that controlling inflation would cost American businesses and households, but he insisted the expense was worth it.

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Although slower GDP, higher interest rates and a weaker labor market can help reduce inflation, he added, “They will also harm households and businesses.”

These are regrettable costs of reducing inflation, but failure to restore price stability would cause much more suffering.

Powell wants to keep inflation from spiraling out of control. It simply means that people will modify their behavior based on their beliefs, creating a self-fulfilling prophecy if they anticipate significant inflation. For example, someone who anticipates a 3% price increase next year is more likely to demand a 3% increase in salary.

When this happened before, Powell’s predecessor, Paul Volcker, had to slam the brakes, dramatically raising interest rates and pushing the economy into recession.

The Federal Reserve’s benchmark interest rate was near zero in March, but has since been raised to a range of 2.25% to 2.5% in an effort to fight inflation.

The Fed is basing its current policy on a lesson learned from the past.

Powell noted that inflation 40 years ago teaches three lessons for the current Fed: that managing inflation is the responsibility of central banks like the Fed, that managing expectations is important, and that “We have to keep going until the job is done.”

Powell pointed out that the Fed’s inaction in the 1970s contributed to the persistence of high inflation expectations and the drastic rate hikes of the early 1980s. In this case, then-Fed Chairman Paul Volcker , caused a recession to control inflation.

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