Why Did Fed Chairman Powell Warns Of “Some Pain” From Inflation?

Chairman Jerome Powell stated that the Federal Reserve “will keep at it” in combating inflation until “the work is done.” He made reference to the past by invoking the names of former leaders of the Federal Reserve, including Paul Volcker and Alan Greenspan.

Powell’s brief statement was intended to send a single message to markets unsure whether the Fed will be as aggressive in raising rates when it meets in September as it was when it met in its previous two meetings. This uncertainty has caused markets to be in a state of confusion.

Powell emphasized that in order to reduce inflation, a persistent period of growth that is below trend would likely be required. In addition, there will almost certainly be a slight loosening of circumstances in the labor market.

In addition, he issued a word of warning, saying that “although higher interest rates, slower growth, and softer labor market conditions may bring inflation down, they will also bring some pain to consumers and companies.”

The speech started a little sooner than expected, but there was a little advanced warning for TV pundits to modify their programs. This may even signal how seriously Powell is taking the topic.

The markets reversed course almost quickly after first falling, with the Dow Jones Industrial Average falling 200 points before beginning to recover. Analysts highlighted that despite Powell’s words, markets have already anticipated the speech to have a hawkish tone. This was something that was pointed out by analysts.

After two straight increases of 75 basis points, Wall Street is pricing in an increase in interest rates of 50 basis points for the month of September. However, this is partly predicated on the expectation that inflation is starting to drop off of its recent high levels. While some recent statistics have provided credence for that view, the majority of the progress has been brought about by a significant decline in the price of gasoline. A resurgence of high costs is also possible in the event that the conflict in Ukraine or China’s fight against the coronavirus escalates.

Fed Chair Signals More Rate Increases Ahead, Shaking Wall Street
Fed Chair Signals More Rate Increases Ahead, Shaking Wall Street

The Bureau of Economic Analysis announced earlier on Thursday that inflation decreased marginally in July, while consumer expenditure increased slightly during that same month. Neither of these events is expected to cause the Fed to alter its plans for the near future.

“According to Robert Frick, corporate economist at Navy Federal Credit Union, “Americans did not earn much more in July and they did not spend much more either, but any improvements at this stage given the shock of inflation are excellent news for the economy.” “And even after adjusting for inflation, those gains in consumer spending came out positive.”

According to Frick, “There is no question that we have gotten more defensive in our spending, and we are also being compelled to fork out more money on housing and utilities.” However, overseas travel has also seen a significant uptick as more people who are in a position to do so have taken advantage of the strong dollar.”

In a separate development, the consumer confidence index compiled by the University of Michigan increased by 13% from July to August, outpacing analysts’ projections as a result of a stronger perspective for the future.

According to the research, “the gains in mood were apparent across age, education, income, area, and political affiliation.” These improvements in sentiment can be related to the recent reduction in inflation.

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