Fed: “Powell says history warns against premature easing policy”

Powell signaled that the US central bank would likely continue to raise interest rates and leave rates higher for a while to dispel inflation, and countered the idea that the Fed would soon reverse course. Highlights from the statements;

-Restoring price stability will likely require maintaining a restrictive policy stance for some time.

-Historical records strongly warn against premature easing of policy. This brings me to the third lesson, which is that we have to keep going until the job is done. History shows that as high inflation becomes more entrenched in wage and price setting, the employment costs of reducing inflation will increase with a lag.

-While consumers and businesses will suffer economically, returning inflation to its 2% target is the central bank’s “overarching focus now”.

-Our decision at the September meeting will depend on the aggregate of incoming data and the evolving outlook.

-Re-establishing price stability will take some time and requires vigorous use of our tools to better balance demand and supply.

-Restoring price stability will require a period of below-trend ‘continuous’ growth and a weaker labor market. Higher interest rates, slower growth and softer labor market conditions will reduce inflation, while bringing some pain to households and businesses.

-While lower inflation readings for July are welcome, a single month’s improvement falls far short of what the committee needs to see before it can be sure inflation has fallen.

-We are deliberately moving our policy stance to a level that is restrictive enough to return inflation to 2%.

-The most recent individual projections by committee participants from the June SEP showed the median federal funds rate to be just under 4% through the end of 2023. Participants will update their forecasts at the September meeting.

US central bankers face the highest inflation in 40 years. In his speech at the conference a year ago, Powell said that price pressures were limited to a relatively narrow group of goods and services. But within months, these price increases began to spread, and by the time the Fed started raising interest rates from near zero, inflation was already three times its 2% target. In this environment, the main criticism was that the Fed was slow to detect risk, and they are now acting aggressively to prevent prices from accelerating any further. In this context, the Fed has increased 75 basis points in its last two meetings, in a stance that signals that the same thing may be on the table again when they come together next month.

Meanwhile, according to the Fed’s preferred indicator, inflation increased by 6.3% for the 12-month period ending in July, while the core indicator, which excludes food and energy, increased by 4.6%.

Investors reacted to the talk by prolonging the rise in short-term Treasury yields. The 2-year bond rose as much as 3.44%, while the 2- to 10-year yield curve remained on an inverse slope. Prior to Powell’s speech, investors were seeing roughly the equal probability of a half-point or three-quarter point increase at the Fed’s September 20-21 meeting. Swap traders’ pricing is still in the mid 50 to 75 bps, slightly closer to 75, while the amount of federal rate cuts priced for 2023 has receded a bit. Investors were pricing in the possibility of cuts in the second half of 2023, although Fed officials began to oppose this view.

Other Fed speakers in recent days have also backed off against expectations that the Fed will quickly shift to a restrictive policy stance and then begin to loosen. Fed officials had predicted in June that rates would rise to 3.4% by the end of this year and 3.8% by the end of 2023, according to their median forecast. They will update these estimates in September. Policymakers looking beyond the current rate-rise cycle are trying to assess whether long-term inflation pressures will persist.

Kaynak: Tera Yatırım-Enver Erkan
Hibya Haber Ajansı