Powell's Prescription: Tighter Borrowing Terms to Tame Inflation and Strengthen Economy


Federal Reserve Chair Jerome Powell, addressing the Economic Club of New York, expressed that the robustness of the US economy and the ongoing labor market challenges might necessitate more stringent measures to manage inflation. Nevertheless, elevated interest rates in the market could potentially mitigate the necessity for additional actions by the Federal Reserve.

While Powell's remarks did not explicitly endorse this perspective, financial markets appeared to interpret them as such. As a result of the speech, investor expectations for another rate increase by the Fed this year diminished, dropping from approximately 40% before Powell's address to less than a third.

Powell noted that raising the Fed's basic interest rate is intended to influence financial conditions. The bond market is now creating tighter financial conditions for various reasons, such as improving economic performance in the United States, regardless of expectations from the Fed.

This is a key difference, as Powell emphasized. If investors pushed long-term bond yields higher simply because they expected the Fed to hike short-term rates, then the Fed would have to intervene to prevent long-term rates from falling.

A distinct dynamic may be emerging, which, according to Powell and his colleagues, could gradually supplant the Federal Reserve's interest rate modifications with market-driven shifts.

Powell emphasized the need for caution and the importance of carefully evaluating the most recent economic and labor market data. He also highlighted the newfound risks and uncertainties confronting the Federal Reserve as it endeavors to strike a delicate balance between the challenges of inflation and sustaining economic growth.

Aside from that, Powell mentioned the geopolitical hazards linked to the attack on Israel, underscoring the imperative of diligent monitoring and comprehensive assessment of their potential repercussions on the economy.

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