Stay the course until inflation is truly whipped

Investors these days parse Federal Reserve Chairman Jerome Powell's every remark for any sign the pain of higher interest rates will end soon. He recently disappointed them again in his annual speech at a central banking conference in Jackson Hole, Wyo., which is much to the good.

"Although inflation has moved down from its peak — a welcome development — it remains too high," Powell said. He added that the central bank will keep monetary policy at its current "restrictive level" until there is more evidence that inflation is truly whipped.

Many on Wall Street were hoping to hear a more dovish signal that the Fed would declare victory soon. This would entail a premature rate cut while hoping inflation would continue to drift downward. The Fed chief pointed specifically to prices for services excluding shelter as having remained sticky.

Powell's speech was consistent with his earlier promises to avoid the "stop-go" policy errors of the 1970s. In that decade the Fed's premature declaration of victory over inflation led to a price-increase ratchet that had to be cured with ever-higher interest rates.

We were especially pleased to see Powell explicitly rebuff the argument from some economists that the Fed should raise its inflation target to 3% from 2%. Powell seems to appreciate that such a change would undermine the Fed's anti-inflation credibility.

One reason to avoid a stop-go monetary repeat is that, as Powell noted, the Fed is uncertain about how the modern economy responds to its policy changes. Economic growth, employment, wages and prices have often not behaved in ways the Fed's economic models predicted since the 2008 financial panic. Powell described this as "navigating by the stars under cloudy skies."

This humility is welcome, but we'd add a note of caution about Powell's approach and the extent to which the Fed remains beholden to the discredited Phillips curve, which posits a direct relationship between employment and inflation. Powell and his colleagues still believe they must slow economic growth and weaken the labor market to guarantee that inflation remains subdued.

Ample experience has shown that low inflation can coexist with a low unemployment rate and strong economic growth. Inflation is its own beast and the Fed's job is to maintain price stability.

Investors had hoped Powell would give them the all-clear on inflation and signal an early rate cut. Mortgage rates above 7% in particular are giving politicians a case of jitters as an election year approaches. But households still digesting 40-year-high price increases, and a two-year decline in real wages, will welcome the signal that Powell plans to stay the anti-inflation course.