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Fed Chair Jerome Powell Signals Cautious Approach Amid Economic Uncertainty

Fed Chair Jerome Powell Signals Cautious Approach Amid Economic Uncertainty

Dec 13, 2023

Fed Chair Jerome Powell Signals Cautious Approach Amid Economic Uncertainty

The Federal Reserve has opted to maintain its policy interest rate as it navigates the precarious path of cooling inflation without significantly increasing unemployment, according to Federal Reserve Chairman Jerome Powell. Despite inflation easing from its peak, Powell emphasized that it remains above the central bank's 2% target and that ongoing progress to bring it down is not guaranteed.

In a recent policy update, the Federal Open Market Committee (FOMC) held the policy interest rate steady and continued to reduce securities holdings. This decision reflects the central bank's careful approach given the current economic uncertainties and risks.

Powell outlined that the economy has shown signs of slowing, with GDP growth expected to cool to 1.4% next year, down from around 2.5% this year. The housing sector has been particularly impacted by higher mortgage rates, and business investment appears to be dampened by elevated interest rates.

The labor market remains tight, with an average of 204,000 jobs added per month over the past three months and a low unemployment rate of 3.7%. Notably, the labor force participation rate has improved, especially among individuals aged 25 to 54 years, and immigration has returned to pre-pandemic levels. Despite this, labor demand still exceeds supply, but the FOMC expects the labor market rebalancing to continue easing inflationary pressures.

Inflation estimates based on the consumer price index and other data indicate that total personal consumption expenditures (PCE) prices rose 2.6% for the year ending in November, with core PCE prices excluding food and energy categories up by 3.1%. The Fed's projections anticipate a gradual reduction in inflation over the next few years, with a median projection of 2.8% this year, falling to 2.4% next year, and reaching the 2% goal by 2026.

Powell underscored the Fed's commitment to its dual mandate of maximum employment and stable prices, acknowledging the hardship high inflation imposes on Americans, particularly on essential costs such as food, housing, and transportation. The Fed has raised the policy rate by five and a quarter percentage points since early last year and has decreased securities holdings by over a trillion dollars, reflecting its restrictive stance aimed at suppressing economic activity and inflation.

The FOMC's projections do not represent a collective decision or plan but rather individual assessments of the future federal funds rate based on various economic scenarios. Powell noted that further rate hikes have not been ruled out if necessary to ensure progress toward the 2% inflation target.

As the Fed continues to monitor incoming data and balance risks, Powell assured the American people of the central bank's dedication to its public mission, pledging to do everything within its power to achieve its employment and price stability goals. The Fed's approach remains measured and data-dependent, with a readiness to adjust policy as required by economic and financial developments.

This was a great exhibition of Fed speak by Powell, who seemed visibly distraught by the situation he finds himself in. At one point he conceded that it is likely that the Fed will begin lowering rates in 2024. One has to imagine that Janet Yellen and Joe Biden are pressuring Powell behind the scenes to end his rate increases so that American citizens feel more financially secure heading into a presidential election year. The space between the rock and the hard place Powell finds himself in is practically disappearing. It seems evident that he's going to have to lower rates in 2024 without having successfully tamed inflation. This is what happens when you allow individuals to centrally plan monetary systems.


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