Powell: "There is a tightening risk... but a bigger mistake would be failing to stabilize inflation"

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed) (right), and Christine Lagarde, President of the European Central Bank (ECB)
[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Seulgina Jo] "The bigger mistake is failing to stabilize prices."

Jerome Powell, Chairman of the Federal Reserve (Fed), stated that while the central bank's rapid interest rate hikes could pose economic risks, the greater mistake would be failing to curb soaring inflation. This is a message that the risk of a recession must be borne to achieve the top policy goal of price stability.

On the 29th (local time), Powell participated in the European Central Bank (ECB) Annual Economic Policy Conference held in Portugal and said, "We are committed to using our tools to bring down inflation." He added, "Is there a risk that (the tightening) goes too far? Of course, there is a risk," but emphasized, "I do not agree that (excessive tightening) is the biggest risk. The bigger mistake is failing to restore price stability."

Powell continued his tough stance on U.S. inflation, which is at its highest level in about 41 years. He said, "Inflation has persisted for more than a year," and "Due to various shocks, we have begun to shift to a higher inflation regime. We will prevent that from happening."

He also stressed the importance of suppressing long-term inflation expectations. This is because it prevents inflation expectations from becoming entrenched and creating a 'self-fulfilling cycle.'

Powell stated, "The U.S. economy is in a good position to withstand tight monetary policy," but also noted, "The Fed cannot guarantee a soft landing for the economy." He cited the changes in how the economy operates due to the COVID-19 pandemic as a concern. Pointing out supply and demand distortions across the economy, he diagnosed it as "a new environment different from before" and "difficult to respond with traditional methods."

Regarding the recent narrowing of the spread between short- and long-term government bond yields, he said, "I am not paying much attention to the shape of the yield curve."

Meanwhile, the forum was also attended by ECB President Christine Lagarde, Bank of England (BOE) Governor Andrew Bailey, and Bank for International Settlements (BIS) General Manager Agustin Carstens. President Lagarde said it would be difficult to return to the previously sustained low inflation environment, mentioning, "The geopolitical shocks and the pandemic we face are changing the landscape." She also hinted at the possibility of accelerating the pace of interest rate hikes if necessary.