Federal Reserve Chairman Jerome Powell said on Wednesday (29th) at the European Central Bank’s annual monetary policy meeting that the U.S. economy is in a “strong state” and that the central bank can reduce inflation to 2% while maintaining a stable labor market. Achieving a “soft landing” without a recession, a task that has become increasingly challenging in recent months.
Powell believes that the U.S. economy can withstand tightening monetary policy, and said raising interest rates without triggering a recession is the Fed’s goal and believes there are ways to achieve it. In addition, Powell also reiterated his remarks following raising interest rates by 3 yards (75 basis points) last month, suggesting that when they meet in late July, they will consider another rate hike of the same size, or raise interest rates by two yards (50 basis points).
He reiterated that the Fed is raising rates “rapidly” in order to quickly move rates into restrictive territory, meaning to keep borrowing costs at a level that would dampen rather than stimulate economic growth.
Asked if he was concerned regarding an inversion of the Treasury yield curve, seen by some as a recession signal, Powell said that wasn’t the biggest concern right now and that the Fed is focusing on reducing inflation. Powell also vowed at the meeting to ensure that rapid price increases are not entrenched, saying: “We will not allow a transition from a low-inflation environment to a high-inflation environment.”
Powell said financial markets are pricing in expectations for a rate hike from the Fed “rather in line with where we’re going,” noting that it was roughly in line with the Fed’s forecast earlier this month.
European Central Bank (ECB) President Christine Lagarde, Bank of England (BOE) President Bailey also expressed their views on inflation. Bailey hinted that BOE will take stronger action to curb inflation, and does not rule out raising interest rates by two yards at the next meeting, if there are signs that prices continue to rise; Lagarde said that it is not only the ECB who has made mistakes on inflation .
In addition, the three central bank governors also talked regarding whether the economy will return to the sustained low inflation environment observed before the epidemic. Lagarde does not think it can return to a low inflation environment. She said that Russia’s invasion of Ukraine will continue to change the current situation and prospect.
Powell said the current economy is “very different” from pre-pandemic, with high inflation, many supply shocks and strong inflationary forces around the world.
Market Reaction
U.S. stocks fluctuated due to economic data and Fed rate hike news. Before the deadline,Dow Jones Industrial AverageGains converged, rising 78.72 points, or 0.25%, to 31,025.71,Nasdaq Composite IndexContinued lower, down 15.43 points or 0.14% to 11,166.11;S&P 500 IndexLosses narrowed, down 3.66 points, or 0.10%, to 3,817.89;Philadelphia SemiconductorThe index fell 68.57 points, or 2.60%, to 2,573.51.U.S. 10-year Treasury yieldfell to 3.102%,US dollar indexrose to 104.685.
