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Powell's hawkish tone indicates another round of rate hikes to come

At the Jackson Hole Economic Policy Symposium this Friday, the boss of the Federal Reserve, Jerome Powell, gave his insights about the national economy and the work that the central bank performed to curb the rise of inflation.

Jerome Powell took a hawkish tone in his speech at the conference, noting that while inflation has tumbled in recent months, it is not yet at an acceptable level. Officials at the central bank are prepared to do whatever it takes to bring the rate down to the 2% target. “Although inflation has moved down from its peak—a welcome development—it remains too high,” Powell said.

CPI inJuly 2023

Source: U.S. Bureau of Labor Statistics

Prices as measured in the Consumer Price Index (CPI) are now 3.2% higher than they were last year, having bucked up in July from 3.1% annual increase in June. Food inflation is at 4.2% and energy is at -12.5% as we can see in the figure released by the U.S. Bureau of Labor Statistics.

Powell acknowledged that the Fed's efforts to raise interest rates and reduce its balance sheet will likely slow economic growth. However, he said that the Fed is "confident that the economy can withstand tighter monetary policy."

Powell's speech was interpreted by many as a signal that the Fed is prepared to raise interest rates by another 25 basis points at its next meeting in September. This would be the twelfth consecutive 25 basis point hike, and it would bring the federal funds rate to a range of 5.25% to 5.5%.

The markets reacted positively to Powell's speech, with stock prices rising and bond yields falling. This suggests that investors believe that the Fed is taking the right steps to address inflation, even if it means slowing economic growth. The Dow Jones Industrial Average rose 88 points, or 0.3%, following the speech. The S&P 500 gained 0.3% and the Nasdaq was 0.3% higher. The yield on the 10-year Treasury note fell to 2.77% from 2.82%.

The positive reaction to Powell's speech was likely due to the fact that he reiterated the Fed's commitment to bringing inflation under control. Based on the Fed’s confidence that the economy could withstand quantitative tightening, this suggests that the Fed is not worried about causing a recession as it raises interest rates.

According to CNBC, markets of late have been pricing in little chance of another hike at the September meeting of the Federal Open market Committee, but are pointing to about a 50-50 chance of a final increase at the November session. Projections released in June showed that almost all FOMC officials saw another hike likely this year.

Markets are still volatile, and it is possible that they could react negatively to future developments, such as a more aggressive tightening of monetary policy by the Fed or a slowdown in economic growth.


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