Federal Reserve Chairman Jerome Powell said tightening monetary policy would curb surging inflation. He has handed official flexibility to make moves in the wake of a slowdown in the economy.
Policymakers hike interest rates again on Wednesday by 75 basis points to a range of 2.25% to 2.5 %. They said that the ongoing increase would be appropriate. The Fed Chair said the increase would depend on how the economy performs. He moved away from providing specific guidance on upcoming hikes as he gave previously.
Powell’s remarks about the slowdown of a rate increase at some point led to the weak market staging a powerful rally. The S&P 500 equity index rose 2.6%. In Asia, equities too gained.
Barclay Plc. Economist Jonathan Millar says that well is not ruling out another 75 to 100 basis point hike in September, which is data-dependent.
Central bankers are shifting the blame on hikes to the highest inflation seen in four decades. Though the latest approach to policy is more real-time, Powell is conveying that Fed will keep pushing the borrowing costs as long as prices jump too fast.
The strategy, however, risks overshooting. Rate increase takes months to filter and make an impact on one economy. Data lags on what happens on the ground level.
Investors anticipate a peak rate of around 3.3% by the year-end before modest cuts by the Fed in 2023. Officials predict rates at 3.4% by 2022 end and 3.8% by December 2023. U.S. Chief economist at Bloomberg, Anna Wong, said that Federal Reserve is still not close to declaring victory over inflation.
Powell told reporters in a press conference after the meeting on Wednesday that they are committed to restoring price stability. He said there were two side risks: too much imposition will lead to a downturn in the economy, and doing too little leaves inflation entrenched.
Powell said it was not their intention to push the economy into recession while achieving a 2 % inflation goal. This would mean an increase in unemployment and a slowdown of the economy.
Fine Line
It is challenging for any central bank to balance growth and recession. The economy is susceptible to shocks. Business sentiments can sour if profits start to vanish, leading to a deeper downturn.
Rising discussion on recession is driving the market sentiment. Thursday’s GDP report for the second quarter is anticipated to have scant growth. At the same time, the earnings of major retailers are expected to be lower.
Investors expect the Fed to lead the easing as early as next year and catch the faltering economy.
The Fed has done that time and again in the past two decades. However, inflation was lower in those days and often remained before the committee target.
