Federal Reserve Chairman Jerome Powell spoke at the American think tank, the Brookings institution, about the Fed’s progress on bringing down inflation. While he acknowledged that forecasts of inflation seem to be coming down over the next year, Jerome suggested that it is too soon to stop raising interest rates. Powell highlighted that the Fed is looking for changes to macroeconomic conditions and said that inflation is mainly due to issues on the supply side, caused by supply chain disruptions due to pandemic restrictions and energy shortages due to the war in Ukraine. Inflation will come down only once supply-side issues improve.
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Jerome Powell’s Speech at the Brookings Institution: What It Means for Markets and Assets
Introduction
Last week, Federal Reserve chairman Jerome Powell spoke at the Brookings institution, an American think tank with close connections to the Fed and the crypto industry. At first, Powell’s speech was perceived as positive by the markets, resulting in a small pump. However, upon closer examination, Powell’s comments suggest that we may see more dips coming. In this article, we’ll summarize what Powell said, explain what it means for the market in simple terms, and explore why the worst may yet be to come for stocks, cryptocurrencies, and other assets.
Powell’s Relationship with the Fed
Powell’s appearance at the Brookings Institution was introduced by Glenn Hutchins, co-chair of the Brookings Institution and member of the board of directors for Digital Currency Group. Hutchins gave a quick history of Powell’s relationship with the Fed. Powell was appointed to the Fed’s Board of Governors by former U.S. President Barack Obama in 2012 and was appointed as Chairman of the Fed by former U.S. president Donald Trump in 2018.
Powell’s Speech
Powell’s speech was similar to the ones he gives at the Fed’s press conferences every six weeks, except that it was shorter and focused on the Fed’s progress on bringing down inflation rather than its reasoning for raising rates. Powell started by saying that inflation is still way too high and cited the Personal Consumption Expenditures Price Index (PCE), the Fed’s favored inflation measure. Powell said that the Fed was expecting a six percent PCE for the month of October. The next day, the latest PCE was released and it was six percent.
Despite inflation slowly but surely coming down, according to paper, Powell said that it is still too soon to stop raising rates, or even start to lower them. That’s because we’ve seen months of inflation coming down only to have it spike back up again. Powell points out that even though headline PCE has come down, core PCE has been moving sideways. Core PCE excludes food and energy.
Powell went on to admit that forecasts of inflation suggest it will come down over the next year, but the problem is that these very same forecasts were saying that inflation would come down this year. Powell said that the Fed is looking for “changes to macro-economic conditions.” This is significant because most of the inflation we’re experiencing right now is mainly due to issues on the supply side, not the demand side. This includes things like energy shortages due to the war in Ukraine and supply chain disruptions due to pandemic restrictions in China and elsewhere. The Fed cannot control these supply-side issues, so all the Fed can do is decrease the demand by raising interest rates.
Jerome implied that the Fed would only start easing once supply-side issues improve. This implies that the central bank can only do so much to fight inflation. Unfortunately, the Fed is trying to regain its credibility as an institution, and Jerome is trying to leave a legacy as the man who tamed inflation. The Fed will continue to decrease demand by raising rates until they come in line with the supply, which will slow the economy, according to Jerome’s admission.
Three Types of Inflation the Fed is Watching
The three types of inflation that the Fed is watching closely are core goods inflation, housing services, and services excluding housing. Jerome explained that core goods inflation has been coming down quickly. Housing-related inflation, however, continues to rise, although Jerome and the Fed are forecasting a massive decline in both the cost of housing and the cost of rents sometime later next year due to contract renewals. This leaves services excluding housing, which Jerome revealed as being the most important to the Fed in its inflation forecasts. Regular services inflation hasn’t shown clear signs of coming down yet.
The Labor Shortage in the United States
Jerome revealed that the labor shortage in the United States is something that the Fed is watching closely because a low supply of labor plus a high demand for labor equals an increase in wages. The Fed sees rising wages as a significant contributor to inflation, which sucks for job seekers. The latest stats suggest that the U.S is short around 3.5 million people, and research by the Fed found that more than 2 million people retired during the pandemic. The remaining 1 to 1.5 million shortage is due to a shrinking population of working-age folks.
Conclusion
Powell finished his speech by saying that the Fed will continue to raise interest rates until the economy slows or comes in line with the supply, which will slow down the economy, and the FED will keep rates high for a very long time, as history suggests. He indicated that the pace of rate hikes isn’t nearly as important as how high the Fed will need to actually raise rates and how long it will need to keep them at that level. Powell emphasized that three things need to happen before the Fed can safely say that inflation is coming down: economic activity must slow, the housing market needs to crash more, and unemployment needs to go up.
In conclusion, Jerome Powell’s speech at the Brookings Institution provides insight into the Fed’s thinking and strategies to combat inflation. While some may perceive his comments as positive for the markets, we may see some dips before inflation truly starts coming down. The Fed is aiming to regain its credibility and tame inflation, but the path ahead may be rocky for stocks, cryptocurrencies, and other assets.
