Reuters, WASHINGTON, July 27 – The Federal Reserve declared on Wednesday that it would not relent in its fight against the strongest outbreak of inflation in the United States since the 1980s, even if doing so results in a “sustained period” of economic gloom and a weakening labor market.
Fed Chair Jerome Powell was asked repeatedly whether the U.S. economy was in or headed for a recession as he explained the rationale behind the sharpest interest rate increases in roughly four decades. Powell rejected this idea, noting that American businesses continue to hire more than 350,000 new employees each month.
After the conclusion of the most recent policy meeting of the U.S. central bank, he told reporters, “I do not think the U.S. is currently in a recession.”
He cited the unemployment rate, which is still very close to a half-century low, as well as strong wage growth and job gains. Why the United States would be in a recession defies logic. But the central bank’s overnight interest rate has now been raised from close to zero to a range between 2.25 percent and 2.50 percent thanks to the 75-basis-point rate rise announced by the Fed on Wednesday, together with prior measures in March, May, and June.
Since Paul Volcker, a previous chair of the Federal Reserve, battled double-digit inflation in the 1980s, that is the fastest tightening of monetary policy. This time, consumer prices haven’t yet surpassed the 10-percent threshold, but at 9.1 percent, they are near enough to up the stakes for the Fed and the Biden administration, which is particularly concerned about the topic in light of the upcoming legislative elections in November.
Powell recognized that the economy was slowing and would probably need to slow even more for the Fed to bring the pace of price increases back to earth, even if he said he did not believe a recession would be necessary to remedy the issue this time.
Powell stated at a news conference that “we do want to see demand running below potential for an extended period to generate slack” in the economy. “We are attempting to do the proper amount. A recession is not something we’re attempting.” He was clear that the Fed’s course would be determined by inflation, and that if it does not start to slow down, “another exceptionally big (rate) hike could be justified” when the Fed meets again.
This year, Powell and many of his Fed colleagues made policy pledges based on data, particularly on inflation, that caught them off guard and required them to make quick adjustments. Little particular information about what to anticipate next was provided by the Fed chairman, which places a strong emphasis on the following two months’ worth of data.
This time, the Fed’s customary six-week gap between policy meetings is eight weeks, giving policymakers “quite a lot of data” to consider, including inflation figures for July and August that will either indicate a slowing in price increases or not. Powell stated that “restoring pricing stability is absolutely something we have to do.” “Failing is not an option.”
Inflation is currently running at more than three times the central bank’s 2 percent target as measured by the Fed’s favored indicator. According to Powell, Fed officials are “acutely aware” of the burden that inflation places on American consumers, especially on those with limited resources, and they won’t give up until they are given “compelling proof” that inflation is decreasing.
Officials stated in the current policy states that “recent indices of expenditure and production have weakened,” despite the fact that job growth has remained “strong.” This is a clue to the reality that the hefty rate hikes they have implemented since March are starting to take effect.
The extent to which growth slowed in the second quarter will be revealed by new data scheduled to be disclosed on Friday. According to Powell, the effects of the Fed’s rate rises to date are still having some effects on the economy. Depending on how inflation reacts in the upcoming months, the Fed may be able to start slowing its rate increase schedule.
As a result, the epidemic era attempts to promote household and corporate spending with cheap money have effectively come to an end. The policy rate is currently at the level that the majority of Fed officials believe has a neutral economic impact. The rate was also achieved in just four months, matching the peak of the central bank’s previous tightening cycle, which lasted from late 2015 to late 2018.
Investors anticipate that the Fed will increase its policy rate at its meeting on September 20–21 by at least a half percentage point. At our subsequent meeting, another exceptionally big hike “may be warranted,” Powell added, “but that is a decision that will depend on the evidence we acquire between now and then.” “We will continue to make judgments at individual meetings and express our ideas as plainly as we can.”
As Powell spoke on Wednesday, futures markets that are based on Fed policy expectations shifted a little bit back toward a more mild hike for the following meeting. The yield on the 2-year note decreased in the U.S. Treasury market, which is crucial in the transmission of Fed policy choices to the actual economy. The 10-year note’s yield barely moved.
The S&P 500 index (.SPX) closed 2.6 percent higher on Wall Street, while the dollar (.DXY) dropped against a basket of major trading partners’ currencies during the session. According to Seema Shah, chief global strategist at Principal Global Investors, “from here, it is plausible that the Fed reduces its tightening tempo, comforted by the expected inflation peaking and downturn in inflation expectations as oil prices have declined.” The labor market is still in good shape, wage growth is still uncomfortably high, and core inflation is expected to drop at a glacially slow rate. The Fed cannot, however, suspend tightening or slow down too much.
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