March 29, 2023

More hikes are coming, Powell warns – Monetary Policy

Federal Reserve Chairman Jerome Powell said this Wednesday that he is firmly committed to the mission of returning inflation to 2% and that the “effects of rising interest rates are not yet felt” in the economy. which means there is still a lot to do.

Powell also stressed that more hikes are to come due to high inflation, stressing that the The Federal Open Market Committee (FOMC) found that “it was not yet time to pause, but rather to slow the size of the hikes.” The impact of this smaller increase on the economy now needs to be assessed.

“Inflation over the last three months shows a slowdown, but we will need more evidence to know that inflation is really slowing,” he explained, adding that “inflation remains very high and the longer it remains, the more the risk is entrenched.” For now, one of the conclusions that can be drawn is that “for the first time the deflation process has already started and that is very good”, he underlined, noting that there are areas where this is not happening yet.

Given the market’s outlook that inflation should slow more quickly and that there may be rate cuts later this year, Jerome Powell said that this is “a different outlook” and that “in this scenario there is no outlook interest cuts this year”.

The head of the US central bank pointed out that the US economy slowed a lot in the last quarter, but that the labor market “remains robust and little changed”, which is similar in services and housing. Looking ahead, Powell’s “outlook” is that wages will decline, but employment strength should outweigh that scenario.

Focusing on the future, the Fed chairman was succinct and said he expected “a slowdown in the labor market, economic growth and inflation to decline more slowly, but not a recession,” which is a scenario not forecast.

About point predictions (map showing how each central bank official estimates interest rate changes) that point to a sustained hike of up to 5.1%, Powell reiterated the idea that this remains a possibility, but opened the door to a scenario in which the final interest rates are higher than expected as it “depends on economic data”.

After saying several times that inflation-fighting measures are being taken with US citizens in mind, the US central bank chairman responded to the latest question by explaining that “it can only be inflation” weighing on consumer sentiment. That, “because unemployment is very low and wages haven’t changed much,” is why it’s extremely important to show that we’re entering a deflationary phase.

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