The US federal Reserve Chair Jerome Powell at a speech at Jackson Hole on Friday hinted that the Fed may continue interest rate hikes further in the coming months to control inflation within its limits.
While he acknowledged the progress that has been made till now, the Fed chair re-iterated that the inflation is continuously above its acceptable levels. Policy makers believe they would have to go for further rate hikes until the situation is comfortable.
Marking the declining pace in the inflation over the past year with the surprising performance of the US economy, Powell noted that the Fed will remain flexible in its approach from now onwards, but he did not indicate regarding easing the situation any time soon.
Powell, in a keynote speech at Jackson Hole, maintained that “Although the inflation has moved down from its peak witnessed last year, which is a welcoming development, it still remains too high from our target of 2% inflation level”. He reiterated in his speech, that “Fed is prepared to hike interest rates further if appropriate; and intends to hold the policy rate at restrictive levels till we are confident that inflation is moving towards our 2% target for inflation.”
The speech Powell gave today at the Jackson Hole, resembled his remarks made last year at the same event where he warned about pain in the incoming months as Fed continues its efforts to bring down the inflation within its limits.
Concerns over contrasting signs
Citing the recent monthly inflation data, he raised some concerns while mentioning that we are keeping a close eye on the signs which show that the US economy is not cooling down as expected, with consumer spending still strong and the housing sector making a rebound. He cleared that the economy continues to grow above their expectations, and if that trend continues “it could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
Meanwhile “the lower monthly data for core inflation in the months of June and July can be seen as welcoming signs, but relying on just two months of data would be too early to call a victory, and is only the beginning towards our objective to bring inflation sustainably down to 2%.”
His observations shows that the Fed is up against mixed signals from the US economy where at one hand, inflation has slowed considerably without much damage to the economy which is a good outcome, but on the other hand some readings have raised the possibility that the central bank’s policy is still not restrictive enough and to complete the task.
He acknowledged that risks are like a double-sided sword by further saying that it was difficult to assess whether the Fed’s current policy rate of 5.25% to 5.5% had cleared the “neutral” interest rate needed to slow the US economy, and thus it’s really hard to assess where the policy is currently standing.
He showed his concerns by saying that “Doing too much could do unnecessary harm to the economy.” which could lead to collapse of housing markets and trigger recession, and “Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment”, which would also have detrimental effects on the US economy.
The markets reaction
Following Powell’s speech at Jackson Hole, markets started trembling and volatility was seen in the markets as Dow Jones Industrial Average and the US treasuries started rising to make highs during the session; however, this reaction was at odds with the markets reaction after his speech a year earlier.
There were negative reactions in the Forex market as USD edged down against euro, following Jerome Powell’s speech at Jackson Hole today where he maintained that policy makers would “carefully proceed”, as they set to decide further interest rate hikes.
The US dollar dropped by 0.06% against the euro, but was up by 0.14% against the Japanese yen.
