Powell: "We have to get inflation to 2 percent".

The president of the U.S. Federal Reserve (FED), Jerome Powell, anticipated Wednesday that the monetary entity will continue to raise interest rates until there is “clear and convincing” evidence that inflation, which is currently at 40-year records in that country, begins to fall in a sustained manner. “We have to get inflation to 2 percent. We have to restore our price stability. It will be challenging to do that and we have to slow growth to do it,” he said. His statement had a negative impact on the markets. The Dow Jones fell 3.56 percent, the S&P 500 4.03 percent and the Nasdaq 4.73 percent, registering the biggest drop since 2020.

In what analysts interpreted as Powell’s toughest statements to date, the official said during a live interview hosted by The Wall Street Journal that “the Fed will continue to push until inflation pulls back in a clear and convincing way.”

The Fed already raised its benchmark rate by 25 percentage points in March and 50 points this month, in what was the largest single hike since 2000, bringing it to a range of 0.75 to 1 percent.

Following the latest upward revision and recent comments from Fed officials and Powell himself, the Fed is expected to make further 50-point hikes during the next monetary meetings in June and July, although the range will depend especially on what happens in the short term with inflation, the Fed chairman explained.

“If the Fed does not see signs of a decline in inflationary pressures, it will consider being more aggressive,” warned Powell, and, if not, “a slower pace of rate hikes will be considered”.

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During the dialogue, the central bank president emphasized the need to curb the problem and described price stability as “the foundation of the economy”, according to Bloomberg.

The FED faces the risk that a tightening of its monetary policy could cool down the economy too much, even generating the possibility of a recession, a fear that has spread to the stock market indexes in recent weeks, already affected by the rate hike itself, with accumulated losses so far this year of 15 percent in the S&P 500 and 24 percent in the Nasdaq.

In this sense, Powell acknowledged that the risks of a tough monetary policy -including a “slight increase” in the unemployment rate- are costs worth paying in order to curb the rise in prices.

So far, the Fed’s stance is to increase the rate until it reaches a “neutral” level by the end of the year (one that will drive neither a contraction nor an expansion of the economy), which is estimated at 2.5 percent, although Powell did not rule out, if necessary, “going beyond the levels that are considered neutral”, if inflation does not calm down.

“The (U.S.) economy is strong and we think it can withstand a less accommodative monetary policy,” said Powell, who last week was confirmed by the Senate for a second four-year term.

In that sense, one data that the FED follows closely to evaluate the state of the economy is the unemployment rate, which in April stood at 3.6 percent.

While there are still a million jobs short of the pre-pandemic levels of February 2020, that month’s unemployment rate (3.5 percent) was near historic lows – not recorded since the late 1960s – in the United States.

In April, the Consumer Price Index rose 8.3 percent year-over-year, according to Labor Department data released last week, down slightly from 8.5 percent in March, when it was a 40-year high.

Although March is considered to be a peak, analysts and economists believe that restrictions due to the flare-ups in China and the development of the war between Russia and Ukraine will continue to put upward pressure on prices.