Jerome Powell – current Chair of Federal Reserve – spoke this Friday the 26th of August. It is very likely that large interest rates hikes will come in the next months. As part of their dual mandate, their goal is to make sure inflation is under control.
Powell accrued a hawkish tone, stating the continuing monetary tightening will cause ‘pain’ for many households and some businesses. Higher central bank interest rates would mean the less money on the market, effectively making the dollar more ‘scarce’. To achieve this, the central bank interest rates rise. Because of this, the consumer interest rates to rise as well.
The effects of inflation:
“These are unfortunate costs of reducing inflation” stated Powell in writing. The Jackson Hole held speech continued with “…a failure to restore price stability will cause far greater pain”.
The Fed’s message spooked investors and caused a sell off in the major indices on Friday . However, in a way, this is good that is happening since the latest inflation rate is now around 8.5%. Indeed, this was lower than the previous month, ~9.5% however the market believed last month that inflation has peaked and started buying again. Because of this, there were a group of investors who believed that because inflation has peaked this would mean the FED will stop raising interest rates.
In reality though, the interest rates need to stay around 2% and until that number is not reached , the Fed will continue to find a way for cuantative tightening.
Jerome Powell wants to curve inflation ?
In the article below there is an in-depth explanation on what inflation is. What Jerome Powell wants to do is actually good in the long run, despite what most markets participants think. The reason for this is because if inflation is not controlled right now, the US can lead into a stagnating economy for the next several years.
For the past months, there have been 0.75% raises of interest rates, the highest and fastest rate increase ever since the 1980’s. Jerome Powell said that this pace might ease up ‘at some point’. The hawkish tone was negatively interpreted by the market and caused a sell of on Friday.
In most recent data, CPI index came down to 6.3% in July, slightly less than 6.8% in June this year. This is a bullish signal for the long term as the Fed’s mandate so far is working to tame down inflation. More about the inflation numbers:
Overall, the consensus is that 2022 will end with an additional 1.25% interest rate hike. There have been rumors about cuantatative easing which is similar to the 2020 policy of the stimulus checks. However, that policy right now wouldn’t make much sense and it would actually have the opposite effect of controlling inflation.
Read more about Jerome’s Powell inflation reduction act:
Before the upcoming elections, the democrats have announced several actions similar to the stimulus check in 2020. However, this will indirectly have a similar effect to 2020. These will somehow contradict the current Fed policy and have the effect of rising inflation again due the increased ‘supply’ of cash on the markets.