Amid an uncertain economic landscape, Federal Reserve Chair Jerome Powell’s recent remarks have amplified the debate on the sufficiency of prevailing interest rates. Even with robust gross domestic product growth, Powell’s address indicated the Fed’s stern stance, as he noted the central bank is “not confident” its restrictive policies have sufficed.
Federal Reserve Chair Admits Uncertainty Over Impact of Interest Rate Policies
Jerome Powell, in a candid exposition at an International Monetary Fund (IMF)-hosted event in Washington D.C., remarked, “We know that ongoing progress toward our 2 percent goal is not assured” and he further added that “inflation has given us a few head fakes.” Powell stated that the Fed is prepared to “tighten policy further” if necessary. His analysis highlighted the Fed’s unyielding resolve to temper inflationary pressures and get to the 2% goal.
Gold prices remained stable amid Powell’s hawkish sentiment, while crypto assets continued to show strength. Bitcoin (BTC) approached the $38,000 mark in the early morning trading sessions on Thursday before receding. All four major U.S. benchmark indices fell, with declines ranging from 0.65% to 1.57%. The Russell 2000 saw the most significant drop at 1.57%, the Nasdaq was down 0.94%, the Dow Jones lost 0.65%, and the S&P 500 decreased by 0.81%. The New York Stock Exchange (NYSE) closed 0.76% lower.
The Fed’s chairman explained the mysterious nature of the current inflationary period, sparked initially by unanticipated shifts in demand and labor supply due to the Covid-19 pandemic. Despite a fleeting decrease in core PCE inflation, Powell said the stubborn resurgence towards the end of 2021 compounded the challenge, entwined with the tight labor market and robust household demand, exacerbating inflationary tensions.
“[A] response of monetary policy to higher prices stemming from an adverse supply shock should be attenuated because it would otherwise amplify the unwanted decline in employment,” Powell insisted. However, the chairman further added that:
Responding aggressively to quickly passing price increases could exacerbate macroeconomic volatility without supporting price stability.
Meanwhile, the 10-year Treasury note is coasting along at 4.636 up 0.98% over the last five days. Manish Kabra, a strategist at Societe Generale SA in London, remarked on Friday that, “Powell’s statement moved the trading consensus that the US 10-year yield has peaked for the year. Hence risk-assets that rallied in the last few weeks are re-assessing ‘what if’ the US 10-year yield is back to 5%,” Kabra added.
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