Chairman of the US Federal Reserve: “We will continue to tighten, even if painfully”

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US Federal Reserve Chairman Jerome Powell’s statements signaled that the central bank will continue its tightening cycle despite recession concerns.

WHAT HAPPENED?

While electricity prices in Germany, France and the UK continued to break record after record, on the other side of the Atlantic, US Federal Reserve (Fed) Chairman Jerome Powell’s statements signaled that the central bank will continue its tightening cycle despite recession concerns. In his speech, which was closely watched by global markets, Powell emphasized that monetary policies should remain restrictive ‘for a while’ in order to reduce inflation and that the Fed’s top priority is to reduce inflation. While the dollar index, which fell to the 107-108 band with the PCE data, rose above 108 again with Powell’s speech, Powell’s statements that “History shows that we need to be careful about early easing” weakened the markets’ hopes for a dovish U-turn. If the war continues, it is expected that the increases in energy prices will continue in the winter months and in 2023, the dollar will strengthen as the Fed becomes aggressive, and the pressure on the euro and developing country currencies will continue to increase.

WHAT DID THEY SAY?

Fed Chairman Jerome Powell started his Jackson Hole speech, which global markets were locked in on Friday, by emphasizing that inflation is the top priority and said, “It will be necessary to keep monetary policy restrictive for a ‘while’ to bring inflation down.” The Fed chairman’s remarks suggest that the possibility of another big rate hike at the September 20-21 meeting is still on the table. Powell said that the final decision will be made by evaluating all US data until the meeting. Pointing out that the US economy is still strong, Powell said that they have taken moderate steps to weaken demand and that the Fed should continue to take these steps until they achieve their goals.

“We need a period of below-trend growth to bring inflation down. Moreover, there will probably be a weakening in labor market conditions. The slowdown in growth and the softening of labor market conditions while interest rates rise will reduce inflation, but households and companies will also suffer some pain in this process,” Powell said, adding that inflation has such side effects, but if price stability is not achieved, the pain will be even greater.

The Personal Consumption Expenditures (PCE) price index data released on Friday showed that inflation did not rise in July compared to the previous month, falling 0.1 percent. The expectation was an increase of 0.6 percent. The annual increase in the PCE index fell to 6.3 percent from 6.8 percent in June. After the data, the dollar index, which retreated to 107.45 as of 16:30 TSI, rose above 108 again after Powell’s messages and spot gold losses exceeded 1 percent.

St. Louis Fed President James Bullard is one of the FOMC members who advocate the Fed to continue with ‘front-loaded’ rate hikes. However, Bullard made a statement after the inflation data in the US, which came below expectations, and said that the tendency for a 50bps increase has strengthened. Bullard said, “We should raise interest rates and reach 3.75-4 percent by the end of the year. Dotplot chart forecasts should be updated as a shorter-term period instead of looking at the next 3 years,” Bullard said.

Philadelphia Fed President Patrick Harker, on the other hand, argues that the Fed should raise interest rates to 3.5 percent by the end of the year and monitor how the economy responds: “We don’t need to raise them quickly and then quickly lower them again. Let’s raise rates and keep them there and let the economy run its course and watch it.”

WHAT WILL HAPPEN?

“Interest rates have to stay high for a long time”
Atlanta Fed President Raphael Bostic said that “we are still in a pandemic economy” and emphasized that inflation is the Fed’s top priority. Bostic also emphasized that he is comfortable with a weakening in the labor market in parallel with rate hikes. In other words, he pointed out that he does not see it as a big problem if Fed policies trying to cool the economy bring an increase in unemployment. Speaking to Bloomberg in Jackson Hole, Bostic also said that he would prefer the Fed to raise rates “sooner rather than later” and pointed out that rates will need to remain high for a long time.

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