Interest rates: a significant decline in the US financial markets after statements calling for raising them

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Jerome Powell at the Jackson Hole Forum

US money markets ended the week sharply lower, following tough remarks by the head of the country’s central bank, the Federal Reserve.

Bank President Jerome Powell said the bank must continue to raise interest rates to prevent inflation from becoming a permanent aspect of the US economy.

His words sent US stocks into a meltdown, with markets plummeting 3 percent.

It comes at a time when Americans have to pay more for basic goods.

Inflation in the world’s largest economy reached its highest level in four decades.

Powell, during a speech at an economic conference in Wyoming on Friday, said the Fed may impose further interest rate increases in the coming months, and might keep them elevated “for some time.”

“Reducing inflation is likely to require a sustained period of growth below the trend,” he said during the Jackson Hole Economic Forum.

Investors are concerned that if economic growth falters, higher interest rates will increase the likelihood of a recession.

Powell acknowledged that controlling inflation would be at the expense of American households and companies, but said it was a price worth paying.

“While higher interest rates, slower growth and weak labor market conditions will lower inflation, they will also cause some pain for households and businesses,” he added.

“These are unfortunate costs of lowering inflation, but failure to restore price stability will mean much more pain.”

Powell wants to avoid entrenching inflation. Simply put, this means that if people think inflation will be high, they will change their behavior accordingly, making it a self-fulfilling prophecy. For example, a person who thinks prices will rise 3 percent next year is likely to seek a 3 percent wage increase.

And the last time that happened, Powell’s predecessor, Paul Volcker, had to hit the brakes and raise interest rates dramatically, sending the economy into recession.

Last March, the Federal Reserve’s key interest rate was close to zero. It has since been raised to a range of 2.25 to 2.5 percent in an effort to tackle inflation.