Federal Reserve Chair Jerome Powell stated this week that the Fed will patiently wait for high interest rates to result in lower inflation. Even with a recent softening labor market, lower rates are not expected in the near term.
Powell Urges Patients and Reliance on Restrictive Policy
Powell stated at a Foreign Bankers Association meeting in Amsterdam, “We’ll need to be patient and let restrictive policy do its work…It may be that [high interest rates] take longer than expected to do its work and bring inflation down.”
Interest Rate Stability
In keeping a patient eye on the current restrictive regime and its struggle to lower inflation, Powell assured those at the Bankers Association that the Fed would likely not be hiking rates further to deal with the current inflationary period. The Fed under Powell thus far intends to maintain the current rate range of 5.25 percent and 5.5 percent, representing the highest levels in 23 years.
Rate Balances Cautious Economic Growth with Moderate Borrowing Expenses
Powell believes that maintaining this rate range will allow the nation to continue to manage economic growth without making borrowing prohibitively expensive.
Labor Market Conditions
The job market experienced a softening in new employment in April. Compared to the 269,000 new jobs created monthly on average during the first three months of the year, only 175,000 jobs were added in April. This figure represents a deceleration, but the labor market overall remains strong.
Economic Forecasts
Persisting high inflation throughout 2024 has caused the Fed to back away from its projected three rate cuts this year. The anticipated cuts were based on projections that the economic indicators of an inflationary environment would be neutralized, which has not been the case. Instead of cuts, Powell anticipates a more extended period of the current high rates.
Inflation Trends
Inflation trends increased from 2.5 percent to 2.7 percent year over year in March. Core inflation, which does not include food and energy prices, was stable at 2.8 percent. These figures are significantly above the 2 percent target rate set by the Fed.
Wholesale Price Movements
Wholesale prices increased in April, which was an unexpected finding. Wholesale prices are one of the first indicators in the supply chain, ending downstream at consumer prices. Powell said that the results in the wholesale prices were “mixed,” indicating some indicators for the prices looked deflationary and some were trending in the wrong direction.
Monetary Policy Outlook
The futures markets have priced in rate cuts throughout the year, taking into account the Fed’s past indications. Now that Powell has reversed course, the markets will make adjustments.
Rate Hike Possibility
Powell stated that he does not presently believe a rate hike will be needed, but he did not rule out the possibility. The Fed is open to making any decision necessary to set inflation at a level approved by its members.
Impact on Consumers
When speaking of current restrictive policies, Powell refers to the Fed setting relatively high interest rates, making it more expensive for consumers to take on debt and loans. This impacts consumers through car loans, mortgages, credit card interest payments, and other loans. In turn, this “tightening” can make individuals more mindful of their spending. They put less money into the economy, focusing on saving and paying their current accounts instead. This helps alleviate inflationary pressures.
Business Investment
Like households, businesses may also delay or reduce investment in growing their businesses during a time of higher interest rates because the borrowing costs are significantly higher. This can slow down job creation and economic growth. If the Fed is too restrictive, an unintended byproduct of this process is triggering a recession.
Conclusion
Powell’s position leading the Fed is an important and unenviable one. Powell is tasked with keeping inflation in check as the Fed’s number one goal.
The other impacts of high interest rates, such as possible recession, a stagnant housing market with many homeowners locked in at older lower interest rates, and the labor market, are all impacted by the interest rate but are not the mandate of the institution to regulate in the same way that regulating inflation is the mission of the Fed.
Global Economic Influence
Powell’s predictions and determinations as the head of the Federal Reserve have the potential to move global markets, foreign exchange rates, trade balances, and international policies. He has indicated his interest in waiting out the restrictive policy to bring down inflation without adjusting up or down for the time being.
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