At the expenses of markets and the economy, the Federal Reserve might continue increasing interest rates, Jerome Powell said.
Federal Reserve Chairman Jerome Powell said inflation was "stronger than expected" in his post-meeting speech. On Wednesday, the Fed opted for raising interest rates by 25 basis points.
Inflation in the United States dropped to 3% in June, more than expected. Though not far from the Fed’s 2% target, Powell said they are aiming at reducing core inflation first.
Core inflation is a consumer price index measuring the effects of more "stable" products. It does not include measures for food and energy, considered the most volatile prices. Core inflation explains better how prices are impacting the average consumer.
Core inflation in the United States is at 4.87%, also lower than expected but further away from the target.
For this reason, at their July meeting the Fed opted for a further rate increase. With yesterday’s decision, interest rates jumped to 5.5%, the highest level since 2001. This is the 11th hike since March 2022, in the fastest tightening policy ever enacted by the Federal Reserve.
Powell also reminded us that current inflationary levels are due to previous tightening announcements. It takes a few months for hikes to have an effect on the economy, therefore yesterday’s decision will lower inflation later in the year. Powell also reminded us that June’s CPI data is just a reading. A revised measurement will come out later this year.
Future challenges
Jerome Powell expressed relief about the nation’s economic health. He declared the banking system is sound and resilient, implying that the threat of a banking crisis is no longer present. He also pointed to positive unemployment data, again better than expected.
However, markets hope this will be the last hike for a long, long time. Wall Street wishes for a halt in monetary tightening, with a short period of stabilization followed by initial rate cuts next year.
Though markets have been rallying for the better part of 2023, they are mostly carried by a handful of over-performing stocks. Especially in artificial intelligence, tech giants like NVIDIA have increased their stock prices by double-digit numbers.
On the other hand, US middle-income firms are collapsing at a worrying pace, pressured by increasing rate increases and a lack of liquidity.
But Jerome Powell declared he "doesn’t know" if rate hikes are over. He considers another raise in September perfectly plausible, claiming the Fed’s decisions are taken meeting after meeting.
Powell knows the Fed is threading the balance between persistent inflation and economic collapse. The following months will be crucial, but it’s too early to predict what the Fed will do. At this moment, a recession is as likely as a "soft landing".
