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US interest rate policy: Powell's "Whatever it takes"

2022-06-16T05:09:55.364Z


The US central bank is attempting to break the inflationary dynamic with a sharp increase in interest rates. But the Fed chairman himself doesn't seem too convinced that this can be done without plunging the economy into recession.


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Jerome Powell: "We're not trying to trigger a recession"

Photo: OLIVIER DOULIERY / AFP

It should sound reassuring: "We're not trying to trigger a recession," Federal Reserve Chairman Jerome Powell said after the Interest Committee meeting.

But the message can also be read differently.

While the Fed does not want to plunge the economy into a downturn, it is willing to take the risk.

The fight against inflation has priority for the central bankers for the time being.

The biggest mistake would be to fail at this task, Powell said: "It's not an option.

We need to restore price stability.«

The Fed carried out the first show of strength in its “whatever it takes” anti-inflation policy on Wednesday.

It raised key interest rates by 0.75 percentage points, the highest level since 1994. Back in May, Powell had declared such a sharp increase to be rather unlikely.

But the latest inflation reports forced the central bankers to act.

In May, consumer prices rose again dramatically at a rate of 8.6 percent.

And at the same time, many Americans seem to be losing confidence that monetary policymakers can really get the problem under control.

According to a University of Michigan survey, long-term inflation expectations are at their highest since 2008. This can create a dangerous dynamic, as expectations of rising prices lead to changes in consumer behavior.

Slowed economic growth, threatened jobs

Powell openly admitted that the central bank's measures to combat inflation have so far not had the desired effect.

“We expected progress but didn't get it.

We got the opposite," he admitted.

That is why the interest rate decision-makers have now opted for “strong action” in the short term.

For the next round in July, Powell is assuming a further increase of 50 to 75 basis points. According to the new Fed forecast, the key interest rate should then rise to 3.5 percent by the end of the year.

The fact that the US central bank is slowing down economic growth and possibly destroying jobs is something she accepts.

Unemployment is expected to rise from the current 3.6 percent to just over four percent by 2024.

That would still be a "historically low rate," Powell argues.

If inflation at the same time approaches the Fed's two percent target again, he believes that "a successful result" would have been achieved despite higher unemployment.

However, he himself seems to have doubts about whether the mission will succeed.

The US Federal Reserve has no control over factors such as supply chain bottlenecks and the sharp rise in energy prices after Russia's attack on Ukraine.

"The last few months have increased the level of difficulty."

The stock exchanges reacted calmly at first, but many economists also doubt that the Fed can manage the upcoming balancing act.

Economist Diane Swonk: "The question is, when do you stop?"

A soft landing is still possible, LPL Financial's Barry Gilbert told CNBC.

"But the trail is getting narrower." The bank Wells Fargo & Co now expects a "mild recession" in the middle of next year.

The Fed has made it clear that it will hike rates until "it breaks inflation," explained Moody's Analytics' Ryan Sweet. "The risk is that they break the economy, too."

The economist Diane Swonk also fears that the central bank could overshoot the target with the series of interest rate hikes: »The question is when do you stop?

They won't know they've gone too far until they do," Swonk told Politico.

Similar doubts seem to haunt the Fed chairman himself: "There is always a risk of going too far or not going far enough," Powell admitted at the press conference.

That didn't sound reassuring.

Source: spiegel

All business articles on 2022-06-16

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