Powell’s speech rocks markets

by | Aug 27, 2022 | Featured, Stock Market | 0 comments

Jerome Powell, the chairman of the Federal Reserve, said on Friday that the Fed is committed to battling inflation and that it would keep raising interest rates in a way that will hurt the US economy to some extent. The Fed would forcefully employ its tools to fight inflation, which is still expected to rise to its highest level in more than 40 years. While Powell emphasised that these factors will likely have a negative impact on families and businesses, slower growth, higher interest rates, and a softer labour market will all serve to restrain inflation. These, in his opinion, are the unfortunate effects of reducing inflation. He emphasised, however, that failing to restore pricing stability might lead to even worse suffering.

The annual policy speech was held in Jackson Hole in Wyoming, where there was a simposum of senior government economists and central bankers from all around the world joining the three-day conference. Because it serves as a place for policymakers to discuss the pressing economic issues on the international agenda and frequently sees major announcements and a flow of new ideas, the gathering is ascribed a special significance.

As Fed’s perspective focuses on a long term, the chariman emphasised that they will keep moving forward with its current policy until inflation approaches its objective of 2%. Powell stated that a restrictive policy will need to be kept in place for a while in order to restore price stability. The historical record clearly cautions against hasty policy easing. 

In the meantime, there are some indications that the inflation in the US is beginning to slowdown. For instance, the personal consumption expenditure price index, the Federal Reserve’s preferred inflation gauge, decreased from 6.8% in June to 6.3% in July.

In addition, the core inflation (which excludes more volatile food and fuel costs) slowed to a 4.6% annual increase, compared with 4.8% in June.

However, it is too early to make any conclusions and for the Fed to depart from its plans to constrain the economy to slow lending and spending and keep price increases under control. Fed officials are likely to wait for clear and persistent evidence before bringing any changes. 

The speech that lasted eight minutes caused a spectacular market sell-off, with the S&P 500 index falling more than 3%. This is the index’s largest decline since June, when the US stock market lost $14 trillion in value. All but six of the companies that make up the stock benchmark saw their shares fall.


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