US Federal Reserve Chair Jerome Powell
In stark contrast to his speech last year, where he called inflation transitory and worried about monetary tightening hurting economic activity, the US Federal Reserve Chairman Jerome Powell has said that halting inflation is now primary.
He said that the monetary authority will continue its interest rate hike even if it means “some pain” to the economy. The central bank placing inflation control first may mean “sustained period of below-trend growth”.
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“The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labour market condition,” Powell said.
“The burden of high inflation will fall heaviest on those who are least able to bear them,” the Fed chief said, while adding that there would be some pain to households and businesses, but these are the “unfortunate costs of reducing inflation”.
His statements were more or less what the market was expecting, said Naveen Kulkarni, Chief Investment Officer, Axis Securities. While Powell is aggressively going after inflation, Kulkarni said that the speech also points to the indication that the pace of hike may be reduced based on incoming data.
The Fed has already raised interest rates by 225 basis points in 2022.
“Fed Chairman Powell, in his Jackson Hole speech, mentioned that the Fed does not want inflation anchored at a higher level and is not afraid to keep the monetary policy restrictive for some time, even if it entails some job losses and growth slowdown. On the other hand, he also mentioned that the Fed will keep an eye on incoming data to chart the future extent of rate increases, and at some point in the future, after further tightening, when inflation expectations start moderating, the Fed will look to reduce the pace,” said Kulkarni.
He said that the US stock markets did have a knee jerk reaction and that there was an increase in the yields, but the “movement reversed a bit, stabilising the markets and yield”.
“We believe this makes the incoming US economic data all the more important to chart the future US Fed course of action,” he added.
Soumyajit Niyogi, Director of India Ratings and Research, too said that Powell’s speech was in line with expectations. “The US markets did have a knee jerk reaction, since the markets had started expecting a benign communication. But inflation has been alarming and much higher than the tolerance level so the Fed is just reiterating its July stand. They haven’t turned more hawkish,” he said.
“Taking a cue from the US stock markets, the Indian equity markets might show some jitteriness on Monday’s opening but the debt market will continue to reflect the domestic growth and inflation dynamics,” he said.
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Aishvarya Dadheech, Fund Manager, Ambit Asset Management sees a rate hike of 75 bps in the September meet. “Only new insight which came out of this speech was the Fed acceptance that economic growth might be compromised over inflation,” he said.
According to Dadheech, the market had already anticipated this. “Nevertheless, the market was already discounting this hike and was not expecting any reversal in their policy normalisation stance any time soon. With initial signs of the US economic data showing signs of deterioration (weak housing sales, PMI data, etc), it will be interesting to see how far the FED can stay on hawkish ground,” he added.
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