“To the extent that there are a series of shocks, it does become rational for people to pay more and more attention,” Powell said. “The clock is kind of running” on how long the Fed can count on low expectations before they move higher. “We will prevent that from happening.”
In earlier remarks on Wednesday in Sintra, Cleveland Fed President Loretta Mester said officials now face an asymmetric choice, warning that the error of assuming inflation expectations are well anchored when they aren’t is more costly than tightening policy too aggressively to make sure they stay that way.
Jens Weidmann, former President of Germany’s Bundesbank, made a similar argument at a separate event earlier this week in Basel, cautioning against the gradualism that had been a hallmark of central banking until this year.
“The more persistent the shock proves to be, the more the delay in monetary tightening increases the risk that companies, households and workers will start to expect that high inflation is here to stay,” Weidmann said on June 26. “In order to prevent de-anchoring, the persistence of inflation should be overstated rather than understated, and a forceful monetary policy response is advisable precisely when uncertainty about it is particularly high.”
Powell implicitly acknowledged the asymmetric choice -- conceding that officials could err and tip the economy into a recession, but arguing that was the lesser of two evils.
“We are committed to and will succeed in getting inflation down to 2%,” he said. “The process is highly likely to involve some pain. But the worse pain would be from failing to address this high inflation and allowing it to become persistent.”
This article was provided by Bloomberg News.