US Fed Chair Says Slower Growth Likely Outcome In Dealing With High Inflation

The US Federal Reserve Chair Jerome Powell said Wednesday that slower economic growth is a possible and likely outcome in dealing with high inflation.

"Since the pandemic, we've been living in a world where economy is driven by very different forces. We know that. What we don't know is whether we will be going back to something that look like what we had before," Powell told at European Central Bank Forum on Central Banking 2022 held in Sintra, Portugal.

"In the meantime, we had a series of supply shocks, we've had very high inflation across the world. We're learning to deal with it," he told the panel titled "Challenges for monetary policy in a rapidly changing world."

Powell reiterated that the US economy is in a strong shape to deal with the Fed's higher interest rates, and added that the aim of rate hikes is to allow supply side to catch up with high demand.

"We hope that (economic) growth still remains positive. Households are in a very strong financial shape, they still got a lot of excess savings ... labor market is tremendously strong. Overall, the US economy is well-positioned to withstand to monetary policy," he said.

"Our aim is to have (economic) growth to moderate. It is a necessary adjustment that needs to happen, so that supply can catch up and supply chains can improve. Right now, supply and demand are really out of balance. We need to get them better in balance so that inflation can come down," he explained.

Powell, however, said there are no guarantees to achieve that aim, dubbing the task "challenging," especially with the war in Ukraine intensifying inflationary pressures on energy prices.

"Our focus is very intensely on setting policy in order to get inflation down to 2% ... getting it under control," he said.

Although Powell admitted that there is a risk in the Fed "going too far" in raising rates, he said the bigger mistake would be to fail restoring price stability.

"Our job is literally to prevent that from happening. We will not allow a transition from a low inflation environment into a high inflation environment," he said.

Energy shock has 'major impact' on inflation: Lagarde

European Central Bank (ECB) President Christine Lagarde said she does not believe the world is going back to environment of low inflation, adding: "There are forces that have been unleashed as a result of the coronavirus pandemic and massive geopolitical shock," referring to Russia's war on Ukraine.

"A lot of movements that have been experienced in the last 20 years were predicated on globalization, on breaking down supply chains, on the reduction of cost. That has changed and will probably change continuously towards a system that we are not certain about," she said.

"The energy shock we have been suffering has had a major impact (on inflation). This is not specific to Europe ... That has had a major impact on prices. It is certainly a strong driving force of inflation, which has been exacerbated by the war."

Lagarde said energy and food prices are clearly important components to take into account for both inflation and inflation expectations.

"We have very low unemployment numbers. We have high employment participation," she said, and stressed the importance of the combination of a "gradual but optional" monetary policy. "As the level of uncertainty clears, it will probably help us towards this optionality."

As factors behind high inflation, Lagarde said "Energy was vastly underestimated, and (supply) bottlenecks were also expected to clear much faster."

Andrew Bailey, the governor of Bank of England, said the task of central banks is "unquestionably" to return to low inflation.

"But, in fulfilling that task, what we are observing is structural changes. I think COVID is leaving a legacy on labor markets, and certainly the European security situation has changed and that is affecting supply chains, resilience of the whole supply system," he explained.

"If we see greater persistence on inflation, then we will act more forcefully," he said. "There will be circumstances that we will have to do more. That's on the table."

Bailey said factors that caused high inflation shifted from the supply chock in the post-pandemic period to food and energy shock due to the war in Ukraine.

Agustin Carstens, general manager of the Bank for International Settlements, said there are many elements in global economy that affect inflation.

"They are not directly under your control. To a large extent, that is what we are seeing today ... And it has been compounded by the Russian crisis," he said.

Carstens said each central bank should move based on their own circumstances. "The level of interest rates have been increasing quite substantially. Global financial conditions have tightened substantially.

"Inflation around the world has been increasing but each central bank faces different dynamic of inflation. Labor markets are very different across the world. There is no one recipe, remedy for all," he said.

While the Fed and Bank of England have entered an aggressive monetary tightening cycle with rate hikes in recent months to tame record-high inflation, the European Central Bank is expected to make its first interest rate increase in July.

The four institutions hold more than $20 trillion combined on their balance sheets. -