One Month of Lower Inflation in US Falls Far Short - Fed's Powell

Four days later, the global markets are still reverberating from Federal Reserve Chairman Jerome Powell’s sobering speech at Jackson Hole. The head of the most influential central bank in the world said that one month of lower inflation falls far short of what the committee would need to see before feeling confident inflation is moving down towards 2 percent. Inflation in the US trimmed to 8.5 percent on an annual basis in July.

The trading and investing markets are still digesting this hard-to-swallow economic pill after two successive quarters of bumper interest rate hikes in the US. The EURUSD is trading around parity and stock markets are recovering in fits and starts from steep downturns. With any false hopes out of the way, traders and investors are pricing in more interest rate hikes in September.

“July's increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting.” Federal Reserve Chairman Jerome Powell.

The speech held few clues as to when the Federal Reserve might slow down the pace of interest rate increases, with Mr. Powell referring to ‘some point’ in the future when the stance of monetary policy tightens further. This seems to imply that there are limits to how aggressive the central bank can be in setting rate hikes, making it a matter of delicate timing until it’s appropriate to slow the pace, possibly to avoid a heavy recession in the US. Restrictive monetary policy will persist for ‘some time’, according to Jerome Powell.

The plain talk spoke volumes about the central bank’s concerns and the Federal Reserve chairman said that history shows that inflation can quickly rise if monetary policy is loosened prematurely.

“Committee participants' most recent individual projections from the June SEP showed the median federal funds rate running slightly below 4 percent through the end of 2023.” Federal Reserve Chairman Jerome Powell.

The US central bank is clearly set on interest rate hikes in the short-to-medium term and is fully committed to a hawkish monetary policy.

“Our responsibility to deliver price stability is unconditional.” Jerome Powell.

Mr. Powell made the interesting point that inflationary expectations can become a self-fulfilling prophecy as households and businesses price them into their budgets. For this reason, the Federal Reserve is moving rapidly to tamp down inflation so that it doesn’t become entrenched in the economy. This is where the US, UK and Eurozone central banks diverge because the European Central Bank (ECB) and Bank of England (BoE) have moved more slowly to control price rises in their regions.

All of these factors are expected to influence the course of the EURUSD, GBPUSD and other USD currency crosses in the foreseeable future.

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