The struggle between the Fed and markets is ultimately a good sign for Biden and Congress because it suggests that the U.S. may be in the endgame of its war against this bout of inflation, but the conflict underscores the central bank’s delicate position.
Federal Reserve Chair Jerome Powell finds himself in the odd position of pushing against financial markets because he wants to squeeze the flow of money pouring into the economy. | Kevin Dietsch/Getty ImagesFederal Reserve Chair Jerome Powell is locked in a battle with stock market investors, who can’t wait to celebrate the gradual easing of inflation. His message: Stop it.
“It is a very peculiar tango that we’re dancing here,” said Torsten Slok, chief economist at Apollo Global Management. “On the one hand, the Fed must surely be very happy with inflation going down. But they don’t want markets to complicate the speed with which we’re going down.” If that data continues to show a steady downswing from a peak of 9.1 percent last June, markets will rightly assess that we’re closer to the end of the Fed’s rate hike campaign. But that’s only as long as stocks don’t soar and bond rates don’t drop so much that spending is being fueled again.
Fed policymakers, meanwhile, have gone out of their way to say they don’t expect to lower rates from the grueling levels in 2023. They have projected that their main policy rate will sit above 5 percent at the end of the year, at least three-quarters of a percentage point higher than where it is now.
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