US Federal Reserve Chair Jerome Powell on Friday (August 25), in his keynote speech at the annual Jackson Hole symposium, delivered a stark message regarding the current state of inflation, asserting that it remains "too high" despite some recent declines. Powell warned that the US central bank is ready to take additional measures to curb inflation, including raising interest rates further if deemed necessary.

Powell's speech emphasised the Federal Reserve's responsibility to maintain price stability and ensure that inflation remains within their target of 2 percent. He acknowledged that while there has been a reduction in inflation from its peak, the current level still poses a concern.

"We have tightened policy significantly over the past year. Although inflation has moved down from its peak, a welcome development, it remains too high," Powell stated.

Following a sequence of 11 successive interest rate hikes, Powell's comments come in the wake of the central bank's primary interest rate reaching a range of 5.25-5.5 percent. This marks the highest level in over 22 years.

Powell outlined the Fed’s intention to keep policy at a restrictive level until it is confident that inflation is on a sustained downward trajectory toward its goal.

This would likely involve raising interest rates to limit borrowing and spending, which could potentially slow down economic growth.

Powell addressed the progress that has been made so far in controlling inflation. He pointed out that on a 12-month basis, the headline personal consumption expenditures (PCE) inflation had peaked at 7 percent in June 2022 and had declined to 3.3 percent as of July 2023.

However, he emphasised that these figures, while positive, do not entirely reflect the true nature of inflation, as they are influenced by volatile factors such as food and energy prices.

"Headline inflation is what households and businesses and experienced most directly, so this decline is very good news. But food and energy prices are influenced by global factors that remain volatile and can provide a misleading signal of where inflation is headed," he said.

The Fed chairman also discussed core PCE inflation, which excludes food and energy components. He noted that core PCE inflation had peaked at 5.4 percent in February 2022 and had gradually decreased to 4.3 percent in July 2023. Powell highlighted that despite the recent moderation, sustained progress is needed to bring inflation back to price stability.

Powell delved into the various factors affecting core PCE inflation, including the dynamics of goods and services inflation. He explained that core goods inflation had fallen significantly due to factors like tighter monetary policy and improved supply chains.

However, the housing sector had experienced notable impacts from monetary policy, with mortgage rates doubling and housing price growth plummeting.

Powell cautioned against prematurely assuming the cooling of the economy. He stated that if evidence emerges of the economy remaining stronger than expected, the Fed might consider further tightening of monetary policy.

He acknowledged the challenges of gauging the neutral rate of interest and the uncertainty around the timing and impact of policy decisions on economic activity and inflation.

Powell reaffirmed the Fed's commitment to achieving its 2 percent inflation target while recognising the complexity of the current economic landscape.

He stressed the importance of risk management and data assessment in guiding future policy decisions, underlining that the Fed will proceed cautiously to achieve both sides of its dual mandate goals.

(Edited by : Shoma Bhattacharjee)

First Published:Aug 25, 2023 8:27 PM IST