WASHINGTON • Calling stable prices the "bedrock" of the economy, Federal Reserve chair Jerome Powell said on Thursday that the United States central bank's battle to control inflation would "include some pain" as the impact of higher interest rates is felt, but that the worse outcome would be for prices to continue speeding ahead.
"We fully understand and appreciate how painful inflation is," Mr Powell said in an interview with the Marketplace national radio programme, repeating his expectation that the Fed will raise interest rates by half a percentage point at each of its next two policy meetings, while pledging that it is "prepared to do more" if data turns the wrong way.
"Nothing in the economy works, the economy doesn't work for anybody, without price stability," Mr Powell said.
"We went through periods in our history where inflation was quite high... The process of getting inflation down to 2 per cent will also include some pain but ultimately, the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that is like. And that is just people losing the value of their pay cheque."
With "perfect hindsight", Mr Powell said, it would have been better to have begun raising rates earlier than March this year, given that inflation began a sharp turn higher last year.
After using aggressive monetary policy to support the economy through the Covid-19 pandemic, the Fed approved a rate increase of a quarter percentage point in March, but some analysts believe policymakers have fallen too far behind to curb price rises without the sort of sharp rate increases that might cause a recession.
Mr Powell said he believes that the country can avoid a serious downturn.
But on the same day that the US Senate confirmed him for a second four-year term as Fed chief in a bipartisan 80-19 vote, Mr Powell also made the central bank's priorities clear.
Above all else, "we cannot fail to restore price stability", he said.
The US economy is facing its toughest inflation problem since the 1970s and early 1980s, when prices at one point rose at an annual rate of 14.5 per cent and then Fed chief Paul Volcker used punishing interest rates to twice throw the economy into recession. The unemployment rate climbed above 10 per cent.
Mr Powell has paid frequent homage to Mr Volcker's commitment to beating inflation, while also saying he still hopes to avoid the sharp trade-offs that Mr Volcker used to bring prices under control.
While inflation is not approaching Volcker-era levels, the quick run-up in the cost of food, petrol, housing and other daily staples has become a politically explosive issue for President Joe Biden's administration. Consumer prices last month were 8.3 per cent higher than they were a year ago.
Interest rates are rising sharply as a result of the policy steps already taken by the Fed, with the rate on a 30-year fixed mortgage jumping from less than 3 per cent last year to more than 5 per cent, and volatile stock markets wiping out trillions of dollars in wealth that will most likely prompt some consumers to spend less - and curb inflation in the process.
"If you are going to use monetary policy to get inflation under control, what you've got to do is tighten up on the consumer to reduce spending. Certain industries, most notably housing, are going to feel that pain. You are going to have mortgage rates over 6 per cent. It is going to make it harder for potential home buyers to buy," said Mr Stan Shipley, a strategist at Evercore ISI.
Mr Biden now has filled the top two Fed jobs and seen two of his other appointees confirmed to the central bank's seven-seat board of governors. The President made clear this week he was giving them full sway to try to lower inflation.
"Tackling inflation is my top domestic priority," the Democrat President said after Mr Powell's Senate confirmation.