The US economy is facing uncertainty, according to Jerome Powell, Chairman of the Federal Reserve (Fed). If too little is done, there is a danger that inflation will run rampant and tighter monetary policy will be required. If it is over-tightened, excessive damage can be done to the economy.
It is the Shakespearean dilemma of being or not being that Powell posed at the Jackson Hole (Wyoming) symposium, where he took on the role of a hawk to warn that, despite progress after eleven interest rate hikes in 18 months, even 5.25-5.50%, the maximum in 22 years, the work is not finished, not even close. He assured that the solid growth of the economy leads to persevering maintenance of the containment recipe.
"Although inflation has fallen from the peak it reached, a welcome development, it still remains very high," he stressed. “We are prepared to raise rates further if necessary and intend to keep monetary policy tight until we are confident that inflation is going down sustainably to a new target,” she warned.
The goal of the governors of the US central bank stands at 2%. Inflation has fallen from 9.1% in June 2022, a record in half a century, to 3.2% today. The matter is complicated when it is observed that core inflation, which excludes the most volatile elements such as energy and food prices, is still very high, at 4.7%.
Powell's pronouncement, in which he showed his claws for analysts, led, from the outset, to the Dow Jones index going from positive numbers to the field of losses.
In his speech, highly anticipated in all economic sectors and with echoes of what he said at the July press conference, he promised that the Federal Reserve "will proceed carefully when deciding whether to tighten more or, instead, keep a constant interest rate policy pending new data”.
One of the questions on the table was finding clues in his words to speculate on whether the Fed will loosen its monetary policy and eye possible rate cuts on the near horizon. That this could happen 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.
Powell highlighted the progress achieved since his appearance a year ago in this same forum. Then inflation had reached 9.1% and it was a major problem. Since then, the fight to cool the economy has paid off. However, the Fed chair said that this year, as last, "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 risk data,” he continued. In his speech, he did not reveal whether there will be another rate hike at the next Fed meeting, scheduled for mid-September, another issue on which there was much speculation. Powell seemed to indicate that, for now, they are planning one more rise in interest rates throughout 2023.
In his words, he showed that, for the central bank, 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 .
All this means that many economists have postponed or canceled their forecast that this tough monetary policy would lead to a recession. On the other hand, optimism has grown regarding a “soft landing” with the application of the Fed's prescription against inflation.
