The Fed chief delivered a strong message: The central bank will likely be forced to make more big rate hikes in the coming months and is firmly focused on fighting the highest inflation in four decades.
Powell acknowledged that this will affect many households and businesses as it slows the nation’s economy and possibly leads to fewer jobs.
“Unfortunate Consequence”
“These are the unfortunate consequences of reducing inflation. But a failure to restore price stability would cause even more damage,” Powell said in the written version of the speech.
Investors had hoped that small signs that skyrocketing inflation is on the way down would prompt the central bank to ease its aggressive interest rate policy.
At 4:15 p.m., a quarter of an hour after Powell’s announcement, the New York Stock Exchange’s broad S&P 500 index had retreated a few tenths, from minus 0.1 percent to minus 0.4. The Dow Jones industrial index was unchanged at minus 0.2 percent, while the technology-heavy Nasdaq composite index rose from minus 0.6 percent to minus 0.3 percent.
Speech not hawkish
According to Elisabet Kopelman, US economist at SEB, no major news was presented by the Fed chief.
— He is rather vague, but signals that they have not completed their task yet and that they will need a tightening Fed interest rate for a while. It is something that the Fed has tried to signal in recent times and has had some impact, she says.
In relation to the concerns that previously existed, Kopelman does not see the speech as hawkish. At the same time, Powell gave no indication of where the Fed will land in its interest rate statement in September.
According to Kopelman, analysts’ forecasts have varied between 50 and 75 points, where an unexpectedly high inflation figure could push the probability closer to 75 points.
— Our forecast is 50 points. But a lot also depends on next week’s employment figures, she says.
If unemployment continues down, wages up, and there are no signs of the labor market cooling off, Kopelman sees that as yet another reason for interest rates to be raised more quickly in the near term.
— The main message is that the interest rate will eventually land at close to four percent, and that it will remain at a high level throughout the next year. It is a signal to the market, not to price in interest rate cuts before then.
The Stockholm Stock Exchange increased
Stocks rose on the Stockholm Stock Exchange. The broad OMXS index went from minus 1.1 percent to minus 0.6 percent while the heavy OMXS30 index went from minus 0.8 percent to minus 0.5 percent.
On the leading European stock exchanges, the London Stock Exchange’s FTSE100 index and the Paris Stock Exchange’s CAC40 index rose marginally, while the Frankfurt Stock Exchange’s DAX index retreated from minus 0.5 percent to minus 0.9 percent.
Powell is speaking ahead of this weekend’s meeting of central bank governors in Jackson Hole, Wyoming. The Federal Reserve has raised interest rates twice by 75 basis points at their last two meetings, most recently in July, to a range of 2.25-2.50 percent. The next interest rate announcement is expected in September.