On Tuesday, July 2, Federal Reserve Chairman Jerome Powell expressed his satisfaction with Washington’s progress to date in implementing efforts to counter inflation over the past year.
The mentioned statement was made at the Central Banking Forum in Sintra, Portugal. At the same time, the Chairman of the Fed noted that to begin the implementation of the process of easing monetary policy, which provides for cutting interest rates, it is necessary to record more evidence that the dynamic of the inflationary process is on a steady downward trajectory. However, these arguments do not negate the fact of progress in reducing inflation toward the target level of 2%, which Jerome Powell drew attention to.
The Chairman of the Fed says that the latest data on the growth in the cost of goods and services in the United States and, to a lesser extent, previous information on the relevant issue indicate a return to the path of disinflation. According to him, the US financial regulator wants to have more confidence that the inflation rate is steadily decreasing to the target level of 2% before making decisions related to easing the monetary policy strategy, including lowering the cost of borrowing.
The above-mentioned forum in Portugal was also attended by the President of the European Central Bank, Christine Lagarde, and Brazil’s central bank Governor Roberto Campos Neto.
Jerome Powell’s statements are important for markets that are watching the actions of the Fed and its global partners. Currently, inflation is showing signs of weakening at the international level. Against the background of the corresponding tendency, some financial regulators have already started lowering the cost of borrowing, for example ECB. It is worth noting that in the era of globalization, many processes performed by different sources of action are coordinated with each other and are in a kind of condition of interconnection. The corresponding specifics of the current historical era also apply to the actions of central banks. Globalization in the economic dimension of human civilization livelihood has also formed a configuration of reality in which the state of affairs in different countries has a certain degree of interdepend in a kind of mutual impact. For this reason, the Fed’s actions are significant not only in the United States but also at the global level. This circumstance is because the US economic system is the largest in the world. According to the nominal gross domestic product (GDP) for 2023, the volume of the mentioned economy amounted to about $26.7 trillion. Also, the economic system of the United States is the largest in the world in terms of purchasing power parity with an indicator of approximately $32.2 trillion.
The personal consumption expenditures price index of the US Commerce Department, which the Fed focuses on as the main gauge of inflation, increased by 2.6% in 12 months in May. This figure is on a steady decline trajectory from about 4% a year ago. At the same time, policymakers do not expect the mentioned indicator to reach the United States central bank’s 2% target by 2026.
Jerome Powell sees progress in the fight against inflation, but at the same time fears that the corresponding process will attain the target level too early and provoke the downworth path in price growth, which two years ago turned out to be the highest since the early 1980s. According to him, the rush to ease monetary policy may cancel out all the results of countering inflation. At the same time, he noted that too late measures in this case could unduly undermine recovery and expansion.
Jerome Powell says that the risks associated with the speed of decision-making in the context of changes in monetary policy are better balanced in the current year. According to him, this state of affairs is due to factors such as the downward trajectory of the inflationary process, a strong economy, and a positive labor market situation. It is worth noting that last year, the financial regulator of the United States repeatedly expressed concern that the premature lowering of the cost of borrowing and the resumption of intensive price increases for goods and services generated significant risk.
In 2024, markets expected at least six interest rate cuts by the Fed by a quarter percentage point each. Since then, market prices have been adjusted to take into account two possible lowering, including one in September and another before the end of the current year. At the same time, members of the rate-setting Federal Open Market Committee at their June meeting predicted only one cut in interest rates.
As part of a response to a question about the likelihood of lowering borrowing costs in September, Jerome Powell said that he was not going to talk about any specific dates. He was also asked about his attitude to the political climate in the United States and the degree of realism of Donald Trump’s victory in the presidential elections in November. On this occasion, Jerome Powell stated that he does not focus on the mentioned topic. It is worth noting that Donald Trump is a fierce critic of the Chairman of the Fed.
Currently, the central bankers of the United States keep their policy rate in the target range from 5.25% to 5.5%. The corresponding indicator, observed since July last year, corresponds to a more than two-decade high.
It is worth noting that the economic system of the United States demonstrates a high level of stability against the background of high borrowing costs.
