Stock markets in the US ended the week sharply lower after sharp comments were made by the country’s central bank, the Federal Reserve.
Bank Chairman Jerome Powell said the bank must keep raising interest rates to prevent inflation from becoming a permanent aspect of the US economy.
His words sent US stocks into a tailspin, with markets plummeting 3%.
It’s because Americans have to pay more for basic goods.
Inflation in the world’s largest economy is at a four-decade high.
During a much-anticipated speech at a conference in Wyoming on Friday, Mr Powell said the Federal Reserve is likely to push through more rate hikes in the coming months and could keep them high “for some time”.
“Reducing inflation is likely to require a sustained period of below-trend growth,” he said at the Jackson Hole meeting.
Investors fear that higher interest rates will increase the likelihood of a recession if economic growth falters.
Mr Powell acknowledged that controlling inflation would be expensive for American households and businesses, but he argued that the price is worth paying.
“While higher interest rates, slower growth and weaker labor market conditions will lower inflation, they will also cause some pain to households and businesses,” he said.
“These are unfortunate costs of curbing inflation, but failure to restore price stability would mean far greater pain.”
Mr Powell wants to avoid inflation taking hold. Simply put, if people believe inflation will be high, they will change their behavior accordingly, making it a self-fulfilling prophecy. For example, someone who thinks prices will rise 3% next year is more likely to want a 3% wage increase.
The last time this happened, Mr. Powell’s predecessor, Paul Volcker, had to slam on the brakes, raising interest rates drastically and sending the economy into recession.
In March, the Federal Reserve interest rate was near zero; It has since been raised to a range of 2.25% to 2.5% to fight inflation.
Add Comment