Powell vows to fight on against inflation

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US Federal Reserve chief Jay Powell today insisted there was no alternative to an aggressive tightening of monetary policy to bring down inflation, declaring the Fed “must keep at it until the job is done”.

Powell’s hotly anticipated speech at the Jackson Hole Economic Symposium (dubbed the “Glastonbury for central bankers” by FT Alphaville) was meant to dispel any doubts about the Fed’s resolve after financial markets in recent weeks had come to believe it might ease up on its new hawkish path. The remarks in Wyoming stood in stark contrast to his address at last year’s event, where he said surging consumer prices were a “transitory” phenomenon.

There was encouraging news for Powell shortly ahead of his speech as new data on personal consumption expenditure, the Fed’s preferred measure of inflation, showed the annual rate cooling to 6.3 per cent in July from 6.8 per cent in June, thanks to a drop in petrol prices. “Core” PCE, stripping out volatile items such as food and energy, hit a nine-month low of 4.6 per cent. The figures follow data yesterday showing the US economy shrank less than originally reported in the second quarter.

Among the attendees in Wyoming was Bank of England governor Andrew Bailey, who has also come under fire over his response to inflation. Markets are now betting that the BoE will have to more than double interest rates to 4 per cent by next May as one projection forecast UK inflation could top 18 per cent.

Political interference in central banks’ independence has become more of an issue as inflation continues to rise. The BoE’s mandate has been questioned by UK prime ministerial favourite Liz Truss, while the Australian government has launched a review into its “embarrassing” central bank.

The FT editorial board argues that central banks need to do some soul-searching if they are to guide economies back towards price stability and safeguard their own independence.

One way they can do this, writes US editor at large Gillian Tett, is through better use of storytelling. Unless policymakers such as Powell can present a convincing “causality narrative,” others will do it for them, she suggests.

But blaming policymakers wholly for the cost of living crisis would be unfair, says the FT editorial board, given an unprecedented pandemic followed by a war that led to surges in oil, gas and food prices.

“In hindsight,” the FT concludes, “the mistakes look more obvious than they did at the time. Central banking is at best an art, not a science.”

Check out our presentation on whether the Fed can tame inflation without causing a recession.

DT is taking a short holiday break on Monday and will be back on Wednesday August 31

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Need to know: the economy

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Global latest

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Science round up

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