The Nub

Stock markets in the US ended the week sharply down following tough comments by the head of the country’s central bank, the Federal Reserve. The bank’s chairman, Jerome Powell, said the bank must continue to raise interest rates to stop inflation from becoming a permanent aspect of the US economy.

Why Does it Matter

During a highly anticipated speech at a conference in Wyoming on Friday, Mr Powell said the Federal Reserve would probably impose further interest rate hikes in the coming months and could keep them high “for some time”. “Reducing inflation is likely to require a sustained period of below-trend growth,” he said at the meeting in Jackson Hole. Investors are concerned that if economic growth falters, higher interest rates will increase the likelihood of a recession.

What Next

Mr Powell wants to avoid inflation becoming entrenched. Simply put, that means if people believe inflation will be high, they will alter their behaviour accordingly, making it a self-fulfilling prophecy. For example, someone who thinks prices will go up 3% next year is more likely to seek a 3% rise in wages. The last time this happened, Mr Powell’s predecessor, Paul Volcker, had to slam on the brakes, raising interest rates dramatically and sending the economy into recession. In March, the Federal Reserve’s key interest rate was almost zero; it has since been raised to a range of 2.25% to 2.5% in an effort to tackle inflation.