Inflation fight has only just begun, says Fed chief: Global markets rocked as Powell hints at more interest rate hints

America is only beginning the battle to bring down inflation, the US Federal Reserve head warned as bond markets were hit by renewed volatility.

Fed chairman Jerome Powell said yesterday that signs of an overheating economy could mean interest rates may have to rise again.

Markets had a rocky session amid fears of further hikes and worries about the impact of conflict in the Middle East. US 10-year bonds sold off.

And yields on the bonds, which move in the opposite direction to prices, hit fresh 16-year highs at nearly 5 per cent. UK bond yields also spiked.

The anxiety spread to stock markets, where London’s FTSE 100 fell 1.2 per cent and the more domestically-focused FTSE 250 lost 1.1 per cent. US stocks saw more moderate declines.

Powell has led the Fed through an aggressive series of rate hikes that have helped to bring inflation down sharply.

But in New York, he said: ‘A few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.’

Economists and Wall Street traders are betting that the Fed leaves interest rates unchanged when officials meet again in two weeks.

But what happens next is unclear.

America, the world’s biggest economy, has continued to grow strongly and maintain a healthy jobs market despite the steep rate hikes so far.

‘We certainly have a very resilient economy on our hands,’ Powell said. ‘Many forecasts called for the US economy to be in recession this year. 

‘Not only has that not happened, growth is now running above its longer-run trend. So that’s been a surprise.’

Yet Powell acknowledged that that is not unalloyed good news as the Fed looks to cool demand to bring down inflation, saying: ‘Additional evidence of persistently above-trend growth, or that tightness in the labour market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.’

The ructions in bond markets are important because US bond yields are a benchmark for borrowing costs throughout the US economy and the rest of the world. 

They complicate the Fed’s job by causing higher borrowing costs, effectively doing the job of rate hikes in cooling demand.

Jonathan Gray, president of asset manager Blackstone, warned the surge in yields would soon hit the wider economy.

‘When 30-year mortgages and car loans cost you 8 per cent it will impact consumer behaviour,’ he told the Financial Times.

‘Growth has been remarkably resilient, but if you keep policy this tight, this long, invariably you will cause the economy to slow down.’