powell on inflation

The US central bank has used different terms to describe inflation over the last two years. Fed chair Jerome Powell has now used “disinflation” to describe the price rise in the US.

As US inflation started to creep up in 2021, Powell said in April that the price rise was “transitory.” In 2019, he used transitory to describe inflation but in a different sense. Back then, the Fed was looking to prop US inflation which was persistently below 2%.

In 2021, as inflation started to rise, Fed maintained that the price rise was due to factors like supply chain issues, strong post-pandemic demand, and higher commodity prices. It expected prices to come down once the supply-demand scenario improved.

In November though, Powel said that the term transitory can be discarded. By then, it was amply clear that inflation was not withering away on its own; if anything, it was on an upward trajectory.

Many economists found Powell’s classification of inflation as transitory controversial from the very onset. However, the Fed did not apparently want to dampen the fragile recovery in US markets and started reversing its accommodative monetary policy only towards the end of 2021.

Fed Feared that Inflation Would Get Entrenched

Last year, the Fed raised rates by a total of seven times. It started with a 25-basis point rate hike in March 2022 but eventually moved to 75-basis point rate hikes. After four consecutive rate hikes of 75-basis points, Fed lowered the rate of rate hikes to 50 basis points in December.

High inflation and the resultant rate hikes took a toll on risk assets last year. However, some investment strategies can outperform during high inflation.

Meanwhile, amid the relentless rise in inflation, towards the middle of 2022, Fed started fearing that inflation would become entrenched. It was worried that high rents and salaries would keep US inflation elevated for a long. It also feared that inflation would become a part of the economy and that even the consumers would get used to it.

US CPI surged to a multi-decade high of 9.1% in June but fell in the subsequent six months. In December, the CPI rose at an annualized pace of 6.5%. On a monthly basis, the CPI and wholesale inflation fell 0.1% in December.

Powell Says Process of Disinflation Has Begun

Amid the steep fall in inflation, Powell sounded relatively hawkish at the recently concluded FOMC meeting where the US central bank raised rates by 25 basis points. Powell said, “We can now say I think for the first time that the disinflationary process has started.”

It was the first time that Powell used the term “disinflationary.” He however dashed pivot hopes yet again and said, it is “very premature to declare victory or to think we really got this.”

Cathie Wood, Jeffrey Gundlach, and Elon Musk are among those who believe that the Fed has gone too far with its rate hikes. They instead believe that the US economy is headed for deflation.

Musk has on multiple occasions predicted a recession and said that Fed is only going to make it worse with its rate hikes. Fed’s rate hikes, recession fears, and the fallout of FTX bankruptcy have also taken a toll on digital assets. We have a guide on whether crypto is recession-proof.

Powell Says that Inflation is Easing but Rates Need to Rise More

At an event in Washington yesterday, Powell said, “The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy.” He however cautioned, “But it has a long way to go. These are the very early stages.”

He added that the Fed would “react to the data.” Notably, the US economy added 517,000 new jobs in January which was way ahead of expectations. Powell said that the report was “certainly strong—stronger than anyone I know expected.” He added, “It kind of shows you why we think this will be a process that takes a significant period of time.”

He warned, “So if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have do more and raise rates more than is priced in.”

US stocks futures are slightly negative today as markets digest Powell’s comments. However, the Nasdaq has rebounded in 2023 and closed with gains for five consecutive weeks.

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