Jerome Powell urges central banks to ‘forcefully’ raise interest rates in battle against inflation

The head of the Federal Reserve has warned US families to expect “pain” as he rallied central bankers around the world to continue cracking down on inflation with aggressive rate rises.

Jerome Powell vowed to “forcefully” use all the Fed’s tools to tackle spiralling price rises in the US, regardless of negative consequences for the economy and households.

Central bankers must keep raising rates to vanquish inflation or risk letting price rises batter the economy for years to come, he warned.

Mr Powell delivered the message in his speech to the annual Jackson Hole Symposium, an influential gathering of central bankers and officials.

The world’s most powerful interest rate setter sent stock markets sliding as he predicted a prolonged economic slowdown and sustained higher borrowing costs, which “bring some pain to households and businesses”.

He said the lessons of the 1970s and 1980s must not be forgotten. If central banks are too slow to act or waver in their determination, inflation risks gathering steam and becoming even harder to eradicate, Mr Powell said.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” he said.

“Reducing inflation is likely to require a sustained period of below-trend growth.

“While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

The Fed has raised interest rates rapidly in recent months, beginning with an increase from 0.25pc to 0.5pc in March, then moving to 1pc in May, 1.75pc in June and 2.5pc last month.

Mr Powell said more 0.75 percentage point jumps could be on the way, despite early indications that inflation may have peaked. Annual rise in consumer prices in the US slowed from 9.1pc in June to 8.5pc in July.

Story continues

“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” said the Fed’s chairman.

Financial markets slipped as investors took the message that the Fed will not change tack just because the economy is slowing down.

The S&P 500 index of leading stocks slipped by more than 2pc before recovering a little of those losses.

The more tech company-focused NASDAQ lost 2.7pc as the prospect of sustained higher interest rates weighs on the prospects of its growth-oriented shares.

Andrew Hollenhorst, economist at Citi, said he expects another 0.75 percentage point rate rise next month which will take the Federal Funds Rate to 3.25pc, the highest rate since early 2008.

The speech “left no room” for doves who think rates do not need to rise much further, as “Powell and other officials are increasingly signalling that financial conditions will have to tighten further until the economy slows more substantially,” he said.

Mr Powell said it is crucial to learn from “the high and volatile inflation of the 1970s and 1980s, and from the low and stable inflation of the past quarter-century,” invoking the experience of Paul Volcker, who served in the role from 1979 to 1987 and is credited with painfully but successfully squeezing inflation out of the economy via higher interest rates.

One of the lessons from that era, he said, is that central banks must show they are getting on top of inflation so that households and businesses stop expecting high inflation, which in turn can become self-fulfilling as workers demand higher wages and businesses routinely jack up prices.

“The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” Mr Powell said. “We must keep at it until the job is done.”

Andrew Bailey, the Governor of the Bank of England, has promised to tackle inflation “no ifs, no buts”, while the European Central Bank’s Christine Lagarde has pledged “determined and sustained” action to get price rises back under control.