The Dow Jones Industrial Average dropped more than 1000 points following a speech by federal Reserve Chairman Jerome Powell that the Fed will again raise interest rates on Aug. 26.



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Spencer Platt/Getty Images

Stocks took a dive on Friday as markets absorbed

Jerome Powell’s

hawkish message at the Federal Reserve’s annual Jackson Hole summit. He’s right even if it’s not what investors want to hear.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” the Fed Chairman said. “The historical record cautions strongly against prematurely loosening policy.” He said the Fed won’t repeat the stop-and-start monetary tightening mistake of the 1970s that extended inflation pain and made it all the more difficult to cure.

Mr. Powell’s tough talk may have been intended to compensate for his mistake after July’s Federal Open Market Committee meeting when he suggested a surprisingly low “neutral” interest rate. That gave investors the impression that his inflation-fighting resolve was weakening, and that tightening would end sooner rather than later. Markets rallied.

Not this time, as Mr. Powell delivered the anti-inflation medicine. Subduing inflation, he said, would require a “sustained” period of weaker economic and job growth: “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” Blunt candor is better than sunny obfuscation.

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The point of increasing interest rates is to reduce demand. The housing market and investment are already cooling. But job growth has remained unexpectedly strong, and consumers have held up relatively well. Real personal disposable income grew 0.3% last month, according to the Bureau of Economic Analysis’s Friday release.

The Biden Administration could mitigate the pain with policies that provide business certainty and encourage investment. Alas, it is doing the opposite with more regulation, spending and taxes. Even liberal economists say the President’s student loan forgiveness will add to inflationary pressure.

The good news for the Fed is that price increases have been moderating of late, and money-supply growth has been slowing for some time. The latter should portend progress in future months. But the Fed has a credibility problem because it was so wrong for so long about rising prices. That explains why Mr. Powell now has to tell markets a harder anti-inflation truth than they expect or want.

Not one Republican Senator voted for the so-called ‘Inflation Reduction Act,’ yet Democrats are ignoring the warning signs and pushing forward with their tax and spend agenda. Images: Reuters/Shutterstock/Bloomberg News Composite: Mark Kelly

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