Howard Schneider, Ann Saphir

WASHINGTON, (Reuters) – Calling stable prices “the bedrock of the economy”, Federal Reserve Chair Jerome Powell stated on Thursday that while there would be some pain from higher interest rates, the worst outcome for inflation control would see prices continue to rise.

Powell told Marketplace that the Fed “fully understands and values how difficult inflation is.” Powell also reiterated that it would increase interest rates by half of a percentage point at the Fed’s next two policy meetings. He added that they are prepared to go further if necessary.

Powell stated that “Nothing works in the economy, and the economy won’t work for anyone without price stability.” We have been through times in history when inflation was very high. While the process to bring inflation to below 2% may be painful, the worst thing is if it fails to be addressed and the economic system becomes stagnant at high levels. We know how that feels. This is not just about people losing their wages.

Powell stated that it would have been “better” to raise rates sooner than March this year. This was because inflation started rising sharply in 2021.

After using aggressive monetary policy to support the economy through the COVID-19 pandemic, the Fed approved a quarter-percentage-point rate increase in March, but some analysts believe policymakers have fallen too far behind to curb price increases without the sort of sharp rate hikes that might cause a recession.

Powell stated that he believed the country could avoid serious economic downturn.

Powell, however, made it clear that Powell’s priority list for the central bank the day after he was confirmed to the Fed Chief position by the Senate in a bipartisan vote of 80-19.

He said that, above all things, “we cannot fail to restore the price stability.”

America is currently facing the most severe inflation problems since 1970s and 1980s when prices rose at 14.5% per year and Paul Volcker, then Fed chief, used punishing interest rates twice to plunge the economy into depression. The unemployment rate rose to above 10%.

Powell often paid tribute to Volcker for his commitment to beating inflation. However, he also stated that he wants to continue to avoid sharp tradeoffs Volcker made in order to control prices.

Although inflation isn’t at Volcker-era levels of course, it has made the political explosive topic of the fast rise in prices for food, gasoline, and other essentials a major concern for the administration. The April consumer price index was 8.3% higher in April than it was a year before.

“FEEL THE PAIN”

As a result, interest rates have risen sharply due to the Fed’s recent policy measures. The rate for a 30-year fixed loan rose from less that 3% last year up to over 5%. Volatility in stock markets has wiped out trillions of US dollars of wealth. These factors will prompt consumers to cut back on spending and reduce inflation.

To control inflation you will need to implement monetary policies. You can do this by tightening up on the consumers and reducing their spending. Some industries will feel the pain, including housing. There will be mortgage rates that exceed 6%. This will make it difficult for prospective homebuyers to purchase,” Stan Shipley of Evercore ISI, a strategist said.

Biden is now in the Fed’s top 2 jobs, and has had two of his other appointees appointed to the bank’s 7-seat Board of Governors. This week, the president stated that he would give them all his power to reduce inflation.

Following Powell’s Senate confirmation, the Democratic President stated that “Tackling inflation is my highest domestic priority.” Fed staff “will provide the knowledge and skills needed in this difficult time for the economy and the families of the nation.”

Powell opened the news conference by stating that he wants to restore price stability for American families. He used Thursday’s radio interview to reinforce this message.