Jerome Powell firm but flexible; a giraffe not a dinosaurs
In the realm of US monetary policy, the Fed statement and the Fed minutes (after a gap of 21 days) are already extremely important documents to assess the trajectory of rates. Another very important indicator is the routine testimony of the Fed chair Jerome Powell. This time, Jerome Powell testified before the Senate on the 22nd of June and before the Congress on the 23rd of June. His single point message at both the testimonies were crystal clear, “The Fed would go all out to contain inflation at all costs.”
What we read from the Senate testimony of Jerome Powell
Here is a gist of what Powell testified before the Senate and the Congress.
a) Fed has a single minded target to bring down the inflation level to 2% level, in a calibrated manner. Powell also hinted at front loading of rate hikes with most of them happening 2022 itself. An important part of the testimony was that no projection was sacrosanct and they would be adaptable based on data flows. Such decisions would be reviewed bottom up in each meeting of the FOMC.
b) Linking inflation and wages, Powell testified that low inflation was a sine qua non for the benefits of higher wages to be palpable to the people. Higher inflation would deplete the benefits of higher wages. Incidentally, Fed focuses on PCE inflation and not on the traditional consumer inflation announced each month around the 10th.
c) Powell has cautioned the Senate that the war in Ukraine and the lockdowns in China could neutralize some of the efforts of the Fed and inflation may continue to be sticky. Early cues were showing progress. While GDP picked up, a slowdown in fixed investments and housing shows that rate hikes are pinching where it needs to.
d) Powell is clear that the demand for labour is vastly in excess of supply and that gap may take time to fill up. Till then inflation will be a challenge since wages will remain high. That is why, in his testimony, Powell has focussed on the importance of proper communication as it impacted the consumer inflation expectations.
e) The most important part of the testimony was the focus on being adaptable. Since inflation had hardened more than expectations, there was front loading of rate hikes. However, was the economy to slow, Powell has clarified that the Fed would not hesitate to undertake a policy turn at the earliest.
f) Normally, attacking inflation is not just about the tools and the strategies and the instruments to handle inflation. It is also about the resolve and the political will to do the same, even in the face of resistance. After all, the first thing the Fed to take on inflation was that it eliminated the word “Transitory” to describe inflation.
g) Summing up the situation at the Senate testimony, Powell called it a clash of imponderables. On the one hand, the Fed had to tighten without disrupting its ideal of maximum employment. At the same time, too much inflation is putting strain the segments of the American population that were the most susceptible to shocks.
In a nutshell, the Fed remains committed to containing inflation with the willingness to change tack if the macros so demanded.
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