Powell and Lagarde warn that the fight against inflation is not over

Harmony between the United States and the European Union.

Oliver Thansan
Oliver Thansan
25 August 2023 Friday 04:21
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Powell and Lagarde warn that the fight against inflation is not over

Harmony between the United States and the European Union. The presidents of the central banks, Jerome Powell (Fed) and Christine Lagarde (ECB), argued this Friday at the Jackson Hole symposium that the battle against inflation is not over.

The two agreed on the recipe. Despite the repeated rises in interest rates, we must be ready to continue on this path and maintain a restrictive monetary policy.

After explaining the changes caused by the pandemic, Lagarde emphasized that a new era has been entered in which the regulations of the past can be broken.

"In the current environment, this means for the ECB to set interest rates at sufficiently restrictive levels for as long as it takes to achieve a return of inflation to our medium-term objective of 2%," said the president of the European Central Bank. .

His speech closed a day that Powell opened with a prescription of the situation in which there was a coincidence.

The US economy is facing uncertainties, according to the chairman of the Federal Reserve. If too little is done, there is a danger that inflation will castle and tougher monetary policy will be required. If it is over-tightened, excessive damage can be done to the economy.

It is the Hamletian dilemma. Powell raised it at the Wyoming meeting, where he acted as a hawk to indicate that, despite the advances after eleven interest rate hikes in 18 months – to 5.25-5.50%, the maximum in 22 years – the work is not finished. The solid growth of the economy leads to perseverance in containment.

"Although inflation has fallen from its peak, a welcome development, it still remains very high," he said. “We are prepared to raise rates further if necessary and intend to keep policy tight until we are confident that inflation will decline sustainably to the new target,” he warned.

The goal of the governors of the US central bank, like that of the ECB, stands at 2%. Inflation has fallen from 9.1% in June 2022, a record in half a century, to 3.2%. The matter is complicated by core inflation, which excludes the most volatile elements such as energy and food prices, because it remains very high, at 4.7%. His pronouncement, as if it required expensive digestion, sent the Dow falling into negative numbers and then back into profit territory.

Powell promised that the Federal Reserve would "proceed carefully to decide whether to tighten more or instead keep rates constant pending new data."

One of the questions that was on the table was to find clues as to whether the Fed will loosen its monetary policy, and thus look for possible cuts on the horizon. That this happens next year is not ruled out, but Powell was aggressive.

“Additional evidence of persistently above-trend (economic) growth could drive further advances in inflation risk and could justify further monetary policy tightening,” it warned. “There is still a lot of ground to cover to return to price stability,” she insisted.

He highlighted the progress regarding his appearance in this forum in 2022. However, Powell pointed out that this year, like last year, "the message is the same," he reiterated. “The Fed's job is to get inflation down to 2%,” he said. "We have to act with caution based on the risks." He did not reveal whether there will be another rate hike at the next Fed meeting in September. He hinted that they have planned a rise throughout 2023.

In his words, he showed that the US economy has been much more resilient than expected, with a labor market still very strong despite the fact that there are not so many job offers, while consumption does not lose steam. “We are watching for signs that the economy is not cooling as we had hoped,” she acknowledged.

“There is always uncertainty about the precise level of monetary policy tightening. But this uncertainty underscores the need for agile policymaking,” he added.

Many economists have postponed or canceled their forecast that this monetary policy would lead to a recession. Optimism about a “soft landing” has grown.