A change in Powell’s comments: Will the rate hike path slow down or not?
It was clear in the press conference held by Federal Reserve Chairman Jerome Powell following the decision to raise the interest rate by 75 basis points, that there is a difference between what he said and what he was saying previously. And that he did something he had not done since the start of the rate hike in March… He avoided setting numbers on how much the rate hike will be at the next meeting in September.
Some analysts explained that the Federal Reserve may ease the pace of interest rate hikes, while others saw the exact opposite. No one can favor one opinion over another.
Even Powell doesn’t know that. “While another unusually large increase may be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then,” Powell said.
He sufficed with pointing out that there are two full months of data before the next meeting of the Federal Reserve, in September.”
During this period, many important reports and indicators will be issued that will determine the path of the reserve, such as employment and unemployment numbers, but the most important are inflation numbers.
This is what was announced by European Central Bank (ECB) President Christine Lagarde after the central bank put an end to an era of negative interest rates in the euro area, surprisingly announcing a large increase of half a point to fight inflation.
“As the economy evolves and responds to many internal and external challenges, the Board of Directors will review the situation and decide on the appropriate pace for our next steps based on the data received,” she said.
Powell provided some “evidence” that the US central bank knew what it was doing. Bringing inflation back to the Fed’s 2 percent target was something the Fed “must do”, and the easing in the robust labor market and economic growth was not only expected, but was a necessary part of achieving lower prices.
He also cited forecasts from policy makers published at the Federal Reserve’s meeting in June that the policy rate would rise to 3.4 percent by the end of the year as the “best evidence” of current thinking. But he noted that inflation has risen and economic activity has been weaker since then.
Inflation reached 9.1 percent in June, while estimates were talking about 8.8 percent, the highest in more than 40 years. Today, the markets are awaiting GDP figures (-1.6 percent in the first quarter), which will determine whether the US economy is entering a recession or not.
“I don’t think the economy is in a recession right now,” Powell said, adding that an “unusually large” increase in interest rates may be appropriate at the September Fed meeting, but the decision will be determined by the economic data coming in between now and then.
Consequently, Powell did not translate his economic remarks into specific guidance on the size of the next Fed rate hike – as it was prior to March, May and June.
With many expressing fears over a slowing economy, Powell sent a message to the markets, saying that policy makers will continue to act with caution. He offered a hint of optimism that the Fed could engineer a soft landing, and another that the inflation backdrop was improving. “There is a feeling that the labor market may return to equilibrium,” he said.
Commenting on the press conference, Allianz Chief Economist Mohamed El-Erian says that one of the unwritten remarks of the FED Chairman that interest rates have reached a “neutral level” after the announcement of a 75-basis point interest rate increase is sure to spark lots of discussion among economists in the coming weeks and months.
Judging from the reaction of the markets the moment he made this remark, it is clear what conclusions the vast majority of investors want these economists to draw.
He adds: “Markets have translated this into the view that the Fed now believes that it has done the bulk of what is needed to tighten monetary policy to deal with what Powell himself described as inflation that is still too high and is doing too much harm to Americans. Given this interpretation, it should not come as a surprise that right after Powell spoke the word neutral, stocks, bonds, and the dollar moved dramatically: stocks rose while bond yields fell, with two-year Treasuries down below 3 percent and the two- and 10-year Treasury curve inverted to 20 basis points. and the dollar weakened.
In tracking some of the investors’ comments in the stock market, the following conclusion can be reached: The Federal Reserve will mitigate the downturn in the economy, as far as possible. At a time when there is still a lot of uncertainty about the extent to which the Federal Reserve will raise interest rates to bring inflation back to 2 percent, Powell is signaling that he will not raise too much or too quickly. He sees his role differently from Paul Volcker, the Fed chairman who wiped out rampant inflation, and engineered a recession by raising the Fed’s key interest rate to around 20 percent.