Powell promises to stay high
Chairman of the Federal Reserve System Jerome Powell He recently took to the stage in Amsterdam on Tuesday with a message that was both resolute and disturbing. The Fed no longer expects multiple rate cuts this year and is instead focused on keeping interest rates at their highest levels in more than 20 years.
Beneath Mr. Powell’s calm demeanor lies a worrying reality. The Fed is unlikely to cut rates this year Or even early next year. The beast of inflation remains stubbornly untouched, as today’s Producer Price Index (PPI) report shows a grim picture of a 0.5% month-on-month increase, which equates to an annual pace of 6.4%. , much more than expected.
Unfortunately, Mr. Powell remains stubbornly resistant to this idea. The Fed’s next action could be to raise interest rates. Rather than a cut.
A shift away from impending cuts
Mr. Powell’s change in tone speaks for itself. His once upbeat confidence in the impending fall in inflation has been replaced by a cautious approach. “We’ll have to wait and see what the inflation statistics turn out to be,” he said, but his remarks conveyed both patience and perseverance. hint of resignation.
The year started with Fed officials are full of optimism. Some positive inflation reports in the second half of 2023 had raised hopes that the inflation dragon would subside sooner or later. It seemed plausible that a few more months of good data would put the Fed on track to hit its 2% inflation target and start cutting rates. But a series of weaker-than-expected inflation reports in the first three months of the year forced the Fed to scrap the script and rewrite its plans for the year.
“I didn’t expect this to be a smooth road, but higher than anyone expected” admitted Powell.
Powell claimed that interest rates are at a high enough level to slow demand “on a variety of measures,” but there is little evidence that this is actually the case. consumer spending Economic activity has exceeded expectations, as evidenced by strong job growth and low unemployment. housing prices It’s rising. corporate profits The stock market rose 10% in the first five months of this year, exceeding expectations. meme stocks Heading towards the moon again.
Axios also notes, “The fact that the hyper-speculative atmosphere is returning raises questions about whether Fed policy is cooling financial conditions, and thus inflationary pressures, as much as advertised.” It is written.
Traders walk the floor of the New York Stock Exchange on May 14, 2024 in New York City. (Spencer Pratt/Getty Images)
Most Fed officials have said they don’t foresee the need for further rate hikes, a view echoed by Powell. “I said based on the data that we have, I think it’s unlikely that the next action we would take would be to raise rates,” Powell said on Tuesday.
The data tells a different story.Core personal consumption expenditure price index rises 3.0% p.a. for the past 6 monthsThis is a significant acceleration from the 1.9% pace of the previous six months.
Future Ministry of Labor consumer price index The Consumer Price Index (CPI) report for April will be important. Wall Street expected both the headline CPI and core CPI to rise 0.3%, slowing from the 0.4% rise in the previous month. This may prove to be too optimistic given the sharp rise in gas prices in April and today’s PPI report of an unexpected 0.5% month-on-month increase. The headline CPI rose 0.4%, according to the Cleveland Fed’s Nowcast.
The Fed caused a resurgence of inflation.
The Fed’s own predictions may be what has reawakened the sleeping dragon. In a recent article on Fox Business, Scott Bessent, founder of Key Square Group He likened Powell’s premature shift to lower interest rates to failing the “marshmallow test” of delayed gratification, leading to easing of financial conditions and a resurgence of inflation. claims.
“Had Chairman Powell refrained from hinting at a rate cut in December and stuck to a ‘longer highs’ scenario, the economy could have slowed enough to allow for an actual rate cut next month,” Bessent said. There is a gender,” he said. write.
I’d like to add to this a point I’ve made several times in Breitbart Business Digest. That said, the fact that Fed officials have consistently predicted that the federal funds rate would eventually return to around 2.5% is likely undermining efforts to tighten financial conditions.this promise that interest rates will fall And today’s temporary highs mean that bonds issued today will be able to be refinanced at lower interest rates in the not too distant future. A company that focuses on the average cost of debt over the life of a project will have a higher You’re more likely to start expanding.
Powell’s claim that interest rates are already at their highest has a similar effect.that Promote economic activity and debt-driven expansion Because everyone from corporate treasurers to homebuyers has been led to believe that interest rates are only going to go down, and therefore every bond or mortgage issued today has the potential to go down. Refinance at a lower interest rate than tomorrow.
Ironically, Mr. Powell may be increasing the likelihood of a rate hike by claiming he does not expect one.Even if Chairman Powell hints that a rate hike is a realistic possibility, financial conditions remain May be tightened to the point where it is no longer necessary.
