“Cautious” is becoming one of Federal Reserve Chairman Jerome Powell’s favorite words. Since emphasizing it at the Jackson Hole symposium in late August, he has repeated it again and again to describe the Federal Reserve’s next monetary policy moves, given “a range of uncertainties, both old and new, that complicate your task.” The last time was this Thursday in his long-awaited speech at the Economic Club of New York. Although he left the door open for another rate hike, markets have “cautiously” interpreted that to mean there will be no move at the next meeting, which ends on November 1.
By “cautious,” Powell avoids giving too many hints about what he plans to do with interest rates. This Thursday he gave a speech full of nuances, at an event interrupted by the protest of environmental demonstrators. When he restarted the program, he emphasized that the battle against inflation was not yet won; He has said that it is necessary to further cool the economy, he has assured that he will tighten monetary policy if he considers it necessary, but he has also discounted the rise in long-term interest rates and the tightening of economic conditions in general Calmness plays a role. this job. The Federal Reserve president has also boasted that, for now, he is achieving the soft landing he wants: a decline in inflation without triggering a full-blown recession that would increase unemployment rates.
“Inflation remains too high, and a few months of good data is just the beginning of what will be needed to provide confidence that inflation is falling sustainably toward our target,” Powell warned. There is clarity about where inflation will settle in the coming quarters. “Although the road will be bumpy and take some time, my colleagues and I are united in our commitment to sustainably reduce inflation to 2%,” he stressed.
He also outlined the reasons why a soft landing is currently possible. “So far, the decline in inflation has not been accompanied by a significant increase in unemployment, a very positive fact but unusual in history,” he assured. “The repair of supply chains, together with the realignment of supply and demand in the labor market, has enabled disinflation without a significant slowdown in economic activity,” he argued.
Powell reminded that economic growth has systematically increased this year and that indicators continue to emerge showing the strength of activity, such as retail sales for September released this week. In general, he recalled, analysts expect gross domestic product to grow strongly in the third quarter before slowing down in the fourth and next year. “Overall, the record suggests that returning to our 2% inflation target on a sustained basis will likely require a period of below-trend growth and some softening in labor market conditions,” he said.
According to Powell, the emergence of new evidence of continued above-trend growth or that labor market tensions are no longer easing “could threaten progress on inflation and justify further tightening of monetary policy,” he warned.
Long term interest rates
However, at the same time, it acknowledged that “financial conditions have tightened significantly in recent months and long-term bond yields have been a key driver of this tightening.” The secondary market could do some of the dirty work for the Federal Reserve and save it some of the rate hikes, the statement said: “We continue to monitor these developments closely, as sustained changes in financial conditions may have implications for the trajectory of monetary policy.” .
At the last meeting of its Monetary Policy Committee, the Federal Reserve took a breather and left interest rates in the 5.25% to 5.50% range. However, most of its members expected another quarter-point turnaround before the end of the year. In addition, committee members planned to keep interest rates high for longer than expected. According to their forecasts, they would still be in the range of 5.0% to 5.25% at the end of 2024 (5.1% is the median of the forecasts) and still around 4% in 2025 (3.9% is the Average). median).
The Federal Reserve still has two two-day monetary policy meetings until the end of the year: on October 31st and November 1st and on December 12th and 13th. In his speech this Thursday, Powell acknowledged that there is a risk of entrenching both interest rate increases and inflation and that there is a risk of going too far and causing unnecessary damage to the economy. “Given the uncertainties and risks and the progress made to date, the Committee is proceeding cautiously,” he concluded.
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