“Carefully” is becoming one of Federal Reserve Chairman Jerome Powell’s favorite words. Since emphasizing it at the Jackson Hole symposium in late August, he has repeated it again and again to describe the US central bank’s next steps with monetary policy, in the face of “a series of uncertainties, both old and new.” ”, which complicate your task. The last time was this Thursday in his long-awaited speech at the Economic Club of New York. Although he has left the door open to a further rate hike, markets have interpreted the “carefully” as meaning there will be no move at the next meeting, which concludes on November 1.
With “carefully,” Powell avoids giving too many clues about what he plans to do with interest rates. This Thursday he gave a speech full of nuances, in an event that was interrupted by the protest of environmental protesters. Upon resuming the program, he has insisted that the battle against inflation has not been won; He has said that it is necessary to cool the economy further, he has assured that he will tighten monetary policy if he considers it necessary, but he has also dropped that the rise in long-term interest rates and the tightening of economic conditions in general is playing a part. of that work. The president of the Federal Reserve has also boasted that he is achieving the desired soft landing for now: a reduction in inflation without causing a full-blown recession that would raise unemployment rates.
“Inflation remains too high, and a few months of good data are just the beginning of what will be necessary to generate confidence that inflation is falling sustainably towards our goal,” warned Powell, who has warned against There is visibility on where inflation will settle in the coming quarters. “Although the road is likely to be bumpy and take some time, my colleagues and I are united in our commitment to sustainably reduce inflation to 2%,” he insisted.
He has also explained the reasons why a soft landing is being possible for the moment. “To date, the decline in inflation has not come at the cost of a significant increase in unemployment, a very positive fact, but unusual in history,” he assured. “The healing of supply chains, together with the rebalancing of supply and demand in the labor market, has allowed disinflation without a substantial weakening of economic activity,” she argued.
Powell recalled that economic growth has systematically surprised upwards this year, and that indicators continue to appear that show the strength of activity, such as the September retail sales figure, published this week. In general, he recalled, analysts foresee strong growth in gross domestic product in the third quarter, before cooling in the fourth and next year. “However, the record suggests that returning to our 2% inflation target on a sustainable basis will likely require a period of below-trend growth and some weakening of labor market conditions,” he said.
According to Powell, the emergence of new evidence of persistently above-trend growth, or that tensions in the labor market are no longer easing, “could jeopardize progress on inflation and justify further tightening of monetary policy,” he warned.
Long-term rates
At the same time, however, it has acknowledged that “financial conditions have tightened significantly in recent months and long-term bond yields have been an important driving factor behind this tightening.” The secondary market may be doing some of the dirty work for the Federal Reserve and saving it some of the rate increases, according to what it has said: “We remain attentive to these developments because persistent changes in financial conditions may have implications for the path of monetary policy”.
At the last meeting of its monetary policy committee, the Federal Reserve took a breather and kept interest rates in the range of 5.25-5.50%. Most of its members, however, still expected another quarter-point turnaround before the end of the year. In addition, committee members planned to keep rates higher for longer than expected. According to their forecasts, by the end of 2024 they would still be in the range of 5.0%-5.25% (5.1% is the median of the forecasts) and in 2025 they would still be around 4% (3 .9% is the median).
Two two-day Federal Reserve policy meetings remain before the end of the year, on October 31 and November 1 and on December 12 and 13. In his speech this Thursday, Powell has acknowledged that there is a risk of both falling short with rate increases and inflation becoming entrenched and of going overboard and causing unnecessary damage to the economy. “Given the uncertainties and risks, and how far we have come, the committee proceeds carefully,” he concluded.
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