Lowering inflation will ‘bring some pain’ to Americans through lost jobs and smaller raises, Powell says

• Cooling sky-high inflation will "bring some pain" to firms and households, Fed Chair Jerome Powell said.
• Failing to slow the price surge, however, "would mean far greater pain," he added.

The Federal Reserve is pushing forward in its fight to cool inflation, but the path ahead won't come without some economic discomfort for Americans.

Fed Chair Jerome Powell offered few hints toward the central bank's next policy decisions while speaking Friday at the Fed's annual conference in Jackson Hole, Wyoming. The chair reiterated that price stability is necessary to maintaining a strong labor market, and that the Fed will continue to raise interest rates to cool inflation. Data out earlier in August showed prices climbing 8.5% in the year through July, down from the June peak but still near a four-decade high.

Yet the next phase of policy tightening "will also bring some pain to households and businesses," Powell said. Higher rates slow price growth by lifting borrowing costs and weakening demand. That shows up in the form of higher mortgage rates, pricier loans, more expensive credit-card debt. That will slow overall economic growth and weigh on the job market into 2023. As spending wanes, companies will be more likely to cut jobs and issue smaller raises to workers.

Those side effects aren't appealing, especially with inflation already eating away at most workers' raises. The alternative, however, is far worse, Powell said.

"These are the unfortunate costs of reducing inflation, but a failure to restore price stability would mean far greater pain," the chair added.

The Fed last raised interest rates in July, lifting its benchmark rate by 0.75 percentage points to a range of 2.25% to 2.5%. That level is largely regarded as "neutral" by central bank officials, meaning it neither stimulates nor restricts the economy.

Though the increases have already lifted borrowing costs throughout the economy, Powell signaled the Fed is nowhere near done with its hiking cycle. The neutral rate is "not a place to stop or pause," the chair said, adding the Fed's next rate decision in September will hinge on "the incoming data and the evolving outlook."

Powell's remarks weren't entirely hawkish. He noted that, as the Fed lifts rates to restrictive levels, it will likely become appropriate "to slow the pace of increases." With the last two hikes tripling the size of the central bank's typical quarter-point rate increase, there's plenty of room for the Fed to slow its roll.

And while the chair did warn of economic pain and "softer labor market conditions," recent reports suggest it will take much higher rates for hiring to significantly slow. The US added 528,000 jobs in July, doubling the median economist forecast and accelerating from the 398,000 payrolls created the month prior. The unemployment rate returned to its pre-crisis low of 3.5%, and wages rose more than anticipated as well. Despite the Fed lifting interest rates at the fastest pace since the 1980s, demand for workers is still running red-hot.

That labor-market tightness also leaves the door open for the Fed to keep moving aggressively. In closing his remarks, Powell emphasized that the central bank "must keep at it until the job is done," adding that an insufficient response to inflation would only lead to more economic pain in the long run.

"Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy," he said.