Federal Reserve Chairman Jerome Powell on Friday, August 23, formulated what can be called a rhetorical and, in a sense, the ideological semantic platform for easing monetary policy in the United States, which means that the moment is approaching when the financial regulator of this country will decide on cutting interest rates.
At the same time, the head of the US central bank refrained from declaring and predicting intentions regarding specific deadlines for lowering the cost of borrowing and the scale of implementation of the relevant action, which will become a sensitive factor affecting the state of affairs in the space of the United States economic system. It is worth noting that the Fed is characterized by a commitment to such a practice of communicative interaction with the outside world, which involves the frequent use of a tactic of silence regarding plans for fundamental and most sensitive decisions in terms of expected consequences. At the same time, currently, it cannot be the final position on what form of implementation the approach to lowering the cost of borrowing will take, since in this case the important factor is the dynamic of the economy.
During a much-awaited keynote address at the Fed’s annual retreat in Jackson Hole, Wyoming, on Friday, Jerome Powell said that it came time to make adjustments to the monetary policy strategy of the United States financial regulator. Also, in the relevant context, he noted that the direction of travel is clear. Moreover, Jerome Powell stated that the timing and pace of the implementation of interest rate-cutting measures will depend on incoming data, the evolving outlook, and the balance of risks. It is worth noting that among officials of the central bank of the United States, a kind of consensus position has been formed that actions to ease monetary policy should be taken only after receiving the maximum possible amount of information about the condition of the US economic system and the prospects for the subsequent vector of its dynamic.
Markets expected the Fed chairman to make specific or relatively specific statements regarding the perspectives for making changes to the cost of borrowing. At the same time, during his Friday speech, Jerome Powell focused on a kind of retrospective analysis of the inflationary process in the United States. Against the background of the rapid growth in the cost of goods and services, the Fed was forced to make a series of decisions to raise interest rates. The tightening of the monetary policy of the central bank of the United States began in March 2022. Until July 2023, the Fed made 13 decisions to increase the cost of borrowing.
Jerome Powell stated that the US financial regulator has managed to make progress in the area of implementing efforts aimed at decreasing inflation. According to him, the Fed can now equally focus on the other side of its dual mandate. In this case, it implies increased attention to measures aimed at ensuring that the economy remains at full employment.
The Fed Chairman said that inflation has decreased significantly. Jerome Powell also noted that the labor market in the United States is no longer overheated. According to him, conditions in the relevant space are currently less stringent regarding the specifics of the situation that was observed before the coronavirus pandemic. Separately, he noted that the balance of risks for the two mandates of the Fed has changed. Besides, Jerome Powell stated that supply constraints have normalized.
Currently, in the United States, inflation is on a trajectory towards the Fed’s 2% target. It is worth noting that the specified indicator has not yet been reached. Currently, in the United States, the inflation rate, measured based on the Fed methodology, is 2.5%. It is worth noting that a year ago the corresponding indicator was at 3.2%. In June 2022, inflation in the United States exceeded the 7% mark.
At the same time, the tendency of a gradual increase in the unemployment rate is observed in the US. Last month, the corresponding indicator unexpectedly increased to 4.3% after the 4.1% recorded in June. Jerome Powell says that the observed growth in the unemployment rate is the result of the combined effect of factors such as a rise in the number of individuals entering the workforce and a slowdown in hiring. According to him, the mentioned tendency is not related to the increase in the number of layoffs or the general deterioration of the labor market situation.
Jerome Powell stated that the goal of the central bank of the United States was to restore price stability and at the same time maintain a strong labor market, avoiding the sharp rising unemployment that was characteristic of previous episodes of disinflation, when inflation expectations were less well anchored. According to him, the Fed has made significant progress in achieving the mentioned result, but the corresponding task has not yet been fully completed.
Currently, there is widespread expectation in the markets that the central bank of the United States will start cutting interest rates in September. At the same time, as part of his Friday speech, Jerome Powell did not make any statements regarding the most probable timing of the start of easing the monetary policy strategy.
Minutes from the July open market committee meeting, which was published on Wednesday, July 21, noted that most officials of the central bank of the United States are supporters of the point of view that a decision on lowering the cost of borrowing in September would be appropriate. At the same time, in this case, it is separately clarified that the corresponding position will not be relevant if unexpected data on the state of affairs in the space of the US economic system are received.
Recent years have been a period of intense resistance to the rapid growth of inflation for the Fed. The corresponding indicator has reached the highest level in more than 40 years. At the same time, price pressure has eased in the United States over time and the recession scenario has not been realized, although concerns about the likely materialization of the corresponding state of affairs continue to circulate.
A kind of recent history of increased inflation in the United States began in the first half of 2021. At that time, Jerome Powell, his colleagues, and many Wall Street economists characterized the rise in the cost of goods and services as a temporary phenomenon associated with factors caused by the realities of the coronavirus pandemic. They predicted that the impact of the mentioned factors would weaken over time, but as it turned out, inflation was only gaining momentum in 2021. Against the background of the deteriorating situation, the Fed began hiking, ultimately adding 5.25% to its benchmark overnight rate, which was at a near-zero level after an emergency cut of this indicator in the early days of the coronavirus pandemic.
Jerome Powell says that the rise in inflation in recent years has been a global phenomenon. In his opinion, the corresponding process was the result of a rapid increase in demand for goods, strained supply chains, a sharp growth in the price of commodities, and a tight situation in the labor markets.
Jerome Powell attributed confidence in the Fed and well-anchored expectations that inflation ultimately would ease the economy avoiding a sharp downturn during the hiking cycle.
Against the background of Friday’s speech by the head of the central bank of the United States, the value of stocks began to show an upward trajectory. The Dow Jones Industrial Average increased by 381 points or 0.9%. The S&P 500 showed a growth of 1.1%.
The Nasdaq Composite rose 1.7%. In this case, the growth of technology stocks was a significant impact factor. Securities of technology companies have become more expensive, as investors are convinced that lowering the cost of borrowing will be a positive factor for firms of the corresponding category. The value of Nvidia and Tesla shares showed an increase of about 4% in each case. Advanced Micro Devices securities rose by more than 2%.
Small-cap stocks, against the background of the Fed Сhairman’s statements, also turned out to be on an upward trajectory. The Russell 2000 index showed growth of more than 2%.
Naeem Aslam, chief investment officer at Zaye Capital Markets, says Jerome Powell’s statements caused a lot of excitement for traders. At the same time, these statements generally meet preliminary expectations.
Glen Smith, chief investment officer of GDS Wealth Management, says that lowering the cost of borrowing in September is already a de facto resolved issue. According to the expert, at present, the main question is whether the Fed’s decision will be a one-time action or will become the initial stage of the interest rate-cutting cycle.
