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Interest rates will rise until inflation is under control, Fed chair Powell says

ARI SHAPIRO, HOST:

In Jackson Hole, Wyo., the popular summer activities include horseback riding, whitewater rafting and, this week, fighting inflation. Federal Reserve Chairman Jerome Powell was the star attraction there this morning at an annual economic conference. He gave a short, but forceful address in which he promised interest rates will go up and stay up until Fed policymakers are confident that prices are once again under control. The speech triggered a sharp sell-off on Wall Street, where the Dow Jones Industrial Average tumbled more than a thousand points. NPR's Scott Horsley has been following all this. Hey, Scott.

SCOTT HORSLEY, BYLINE: Good afternoon, Ari.

SHAPIRO: There was a lot of anticipation for Powell's speech today. What did he say?

HORSLEY: Well, he was very direct. He said the Federal Reserve has the unconditional responsibility to get inflation back down to 2%, and that he and his colleagues plan to do that even if it causes some short-term pain. The Fed's No. 1 tool for fighting inflation is raising interest rates. That helps curb demand and bring prices down. But Powell acknowledged there can be a human cost to that, including higher unemployment and more tepid economic growth.

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JEROME POWELL: While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation, but a failure to restore price stability would mean far greater pain.

HORSLEY: The Fed has already raised interest rates by 2 1/4 percentage points since March, and Powell says, in order to really curb demand, rates are going to have to go even higher. He did not offer any hints today of whether rates are going to go up half a point or three-quarters of a point at the next Fed meeting in September. He just reiterated that he and his colleagues will be watching the incoming economic data, and that they're prepared to make adjustments depending on what those numbers show.

SHAPIRO: So interest rates are going up, and then what?

HORSLEY: Well, Powell says interest rates are likely to stay up for some time to come. That should not come as a big surprise - the Fed's projections have shown rates likely to stay elevated through at least the end of next year - but some investors were apparently betting that the Fed could snuff out inflation quickly and then start lowering rates again. Powell poured cold water on that idea.

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POWELL: Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.

HORSLEY: And that obviously disappointed some investors. Stocks fell sharply. The Dow, as you mentioned, tumbled more than 3%. The tech-heavy Nasdaq, which is particularly sensitive to interest rates, fell almost 4%.

SHAPIRO: There was some positive news on inflation from the Department of Commerce today. What does it show?

HORSLEY: Yeah, the Commerce Department's inflation yardstick, which is monitored closely by the Fed, actually showed consumer prices fell between June and July, thanks in part to those falling gasoline prices. If you take out food and energy, which bounces around a lot, core prices rose only a tenth of a percent last month, and annual core inflation in July was actually the lowest it's been in nine months, so that is encouraging. Powell called it a welcome development, but he also warned that he and his colleagues are going to need to see more than one month's improvement before they're ready to celebrate.

SHAPIRO: The Fed chairman said he is drawing on the historical record here. So what does history tell us?

HORSLEY: Yeah, Powell talked a little bit about the 1970s, when policymakers really let inflation get out of control for a long period of time - so long, in fact, that people just came to expect prices would keep going up. That made it even harder to turn things around. When former Fed Chairman Paul Volcker finally did crack down, it took a really deep recession to get inflation back in check.

Now, that's not where we are right now. High inflation is still a relatively recent problem. It's not yet baked into people's thinking. That's why Powell and his colleagues are so eager to get control over prices now, before too much additional time passes.

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POWELL: Of course, inflation has just about everyone's attention right now, which highlights a particular risk today. The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.

HORSLEY: Powell's message is, it's better to bite the bullet now and deal with the fallout of these higher interest rates. If you don't get control over inflation, he says, the economy doesn't work for anybody.

SHAPIRO: NPR's Scott Horsley. Thank you.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.

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