Bond markets say the Fed will be cutting rates within months, but Jerome Powell is determined to keep hiking into a slowing economy.
The question came late in the press conference Federal Reserve chairman Jerome Powell held on Wednesday night toDoes the Fed believe the fabled soft landing for the US economy is still possible?
Speculation about what the Fed might have done on Wednesday night has swung wildly since the start of the month, from predictions of a super-sized 0.5 percentage point hike in response to signs inflationary pressures were stepping back up, to expectations the Fed could pause due to financial stabilitySo Wednesday night’s hike, which took the Fed funds rates to between 4.75 per cent and 5 per cent, was the widely expected middle path.
There was some confusion as to what additional policy firming means in practice, but eventually Powell clarified this simply means further rate hikes, and inferred the authors of the Fed statement were just trying to make this sound a bit softer in light of the banking turmoil. The answer was a resounding yes. “Participants don’t see rate cuts this year,” Powell said. “They just don’t.”
Again, Powell’s biggest worry is not financial stability and not even economic growth – it’s preventing inflation and inflation expectations from becoming entrenched in what he sees as a prolonged battle with persistent inflation. Core PCE inflation, the Fed’s preferred measure, is only projected to fall from its current level of 4.7 per cent to 3.6 per cent by the end of 2023 and to 2.6 per cent by the end of 2024, still above the Fed’s target.
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