The war on inflation to be painful, warns Fed

THE chairman of the US Federal Reserve has vowed to ‘keep at it’ to reduce inflation, signalling more sharp interest rate rises.

Jerome Powell told the Jackson Hole conference in the US state of Wyoming that the Fed was taking ‘forceful and rapid steps’ – a stark contrast to last year when he said price rises would be ‘transitory’.

He said bringing down inflation would bring ‘unfortunate costs’, predicting pain – but not acting would mean ‘far greater pain’.

Letting inflation stay high for too long would risk expectations of price rises becoming ‘entrenched’, making it more difficult to lower them. Markets were moved lower by his speech, with the S&P 500 in New York sliding 2.2pc, while in London the FTSE 100 fell 0.7pc.

US two-year bond yields briefly spiked to their highest levels since 2007 before falling back. Powell’s comments will increase expectations that the Fed could hike interest rates another 0.75 percentage points next month, having done so twice already this year.

US interest rates are at 2.25pc, and a 0.75 hike would take them to their highest level in 14 years.

Neil Wilson, analyst at Markets, said Powell ‘really pushed back’ against speculation the Fed would need to start cutting interest rates to avoid a recession. Powell’s words were echoed by Gita Gopinath, deputy managing director of the IMF, who said if inflation was unexpectedly persistent ‘central banks should underscore their resolve to tighten more aggressively, even if it means a sharp cooling of the economy and rise in unemployment.’

She said governments should introduce ‘targeted’ support for families in need but this would need to be budget ‘neutral’ to prevent stoking inflation.