Jay Powell says the Fed will “keep it going” in his hawkish speech on inflation

Jay Powell says the Fed will "keep it going" in his hawkish speech on inflation
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Jay Powell, the US central bank’s determination to tame rising inflation by raising interest rates, declared the Federal Reserve “must keep doing it until it’s done” during his Jackson Hole speech earlier today.

In a widely anticipated speech, the Fed chairman successfully reduced inflation will probably result in low economic growth for the ‘sustained period’. For this, interest rates “need to remain at a level limiting growth for a certain period of time,” he warned.

The US stock market fell sharply after Powell’s speech, with the benchmark S&P 500 down 2.2 percent and the tech-heavy Nasdaq Composite down 2.7 percent.

Powell predicted “some softening in labor market conditions” and “some pain” for households and businesses. “The failure to restore price stability means greater pain,” he said.

Yields on short-term US government debt rose. The yield on the policy-sensitive two-year Treasury note rose 0.04 percentage point to 3.41 percent. The yield on the 10-year note, driven by growth and inflation expectations, was little changed at 3.02 percent. When the bond price goes down, the yield goes up.

Performance Chart (%) for August 26, 2022, showing slide in US stocks after Fed's dovish comments from Powell

Powell’s speech contradicted his message at last year’s Jackson Hole Symposium, when he predicted that the rise in consumer prices was a “transient” phenomenon caused by supply chain issues. Since then, it has become clear that inflation is demand-driven and therefore likely to persist for much longer.

“We are taking moderate and swift steps to better align demand with supply and keep inflation expectations stable,” Powell said.

The Fed chairman returned to the lessons of the 1970s, when he presided over a period of turmoil when the US central bank made a series of policy mistakes and failed to curb inflation. This forced Paul Volcker, who became Fed chairman in August 1979, to throttle the economy and cause more pain than would have been necessary if officials had acted faster.

“The historical record strongly cautions against premature policy easing,” Powell said.

The key lesson of the period was that “central banks can and should take responsibility for ensuring low and stable inflation,” he reiterated, reiterating the Fed’s “unconditional” commitment to tackling inflation.

It also highlighted the risk posed by inflation remaining too high for too long, setting off a chain reaction with people expecting more price rises.

“The longer the current bout of high inflation continues, the greater the chance that higher inflation expectations will strengthen,” he warned.

Financial markets have rallied in recent weeks amid worsening economic data and expectations that the Fed may scale back its efforts to curb demand amid growing concerns. risks of being too severe.

Last month, the central bank raised the federal funds rate to a new target range of 2.25 percent to 2.50 percent, raising it for the second time in a row by 0.75 percentage points.

Fed officials are debating whether a third rate hike of the same magnitude will be necessary or whether they will opt for a half-point increase at their meeting in September.

Powell’s comments prompted traders to shift bets on how top policymakers will ultimately raise interest rates. Futures markets on Friday suggested the Fed would raise the federal funds rate to 3.82 percent by next March.

Futures markets also suggested traders accept that the central bank could keep the rate higher for longer. It was a notable departure, given that investors were reluctant to bet that the Fed would keep interest rates high in the face of a slowing economy.

“The Fed is willing to take more short-term pain to secure the long-term gains of price stability,” said Ashish Shah, chief investment officer for sovereign wealth funds at Goldman Sachs Asset Management. “You can hardly see the pigeons becoming weaker growth. “They want to make sure that inflation and inflation expectations are firmly anchored.”

Powell said that at some point it is appropriate to slow down the pace of interest rate growth. But he dismissed the latest data, which showed inflation easing slightly, as insufficient, adding: “One month’s improvement is far less than what the committee would need to see before it can be confident that inflation is coming down.”

Most officials say they can get inflation under control without triggering a painful recession. That’s against the consensus view among Wall Street economists, who predict at least a mild recession next year.

Economists also expect the U.S. unemployment rate to rise more than the 4.1 percent widely expected by FOMC regional bank presidents in June. The unemployment rate, a bright spot as the economic picture darkens, hits a multi-year low of 3.5 percent.

Are we headed for a global recession? Our economics editor Chris Giles and US economics editor Colby Smith discussed this and how different countries will react in the latest IG Live. see it here.

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