Federal Reserve boss Jerome Powell must take care to disabuse markets of the notion that the Fed will soon be done tightening monetary policy.
Nearly a year ago, when US Federal Reserve chairman Jerome Powell delivered his speech at the annual economic conference in Jackson Hole, a global audience was hanging on every word for insights into the outlook for growth, inflation and monetary policy in an extremely uncertain environment.
Powell must make clear that even if the Fed pivots to smaller interest-rate increases in coming months, that does not necessarily indicate a lower peak: Dudley.In his 2021 address, Powell got it wrong in several important ways. He asserted that a nascent surge in inflation was “likely to prove temporary”, that the low unemployment rate “understates the amount of labour market slack”, and that “we see little evidence of wage increases that might threaten excessive inflation”.
Powell must make clear that even if the Fed pivots to smaller interest-rate increases in coming months, that does not necessarily indicate a lower peak. To convince markets of the Fed’s resolve, Powell will have to be forceful. Many see his warning as mere rhetoric, designed to keep inflation expectations down. They think that once the economy slows, unemployment rises and inflation falls, the Fed will start cutting interest rates long before the 2 per cent target has been achieved.
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