The world is at an historic financial economic crossroads. The United States, the world’s most influential economic power, is recovering from the pandemic and complications added, as a consequence of Russia’s invasion of Ukraine.
With all that happening, as is customarily done every two months, the Chair of the Federal Reserve Bank, Jerome Powell, conducted a 45-minute press conference at 2:30 p.m. ET, Wednesday, fielding more than two dozen questions from the free world’s best economic journalists. Here’s a summary of what the Federal Reserve chairman said today affecting investment decisions.
1. Fractional 2023 Growth. The Federal Open Market Committee (FOMC), which decides the level of interest rates, expects fractional growth, but not a recession in 2023. Mr. Powell said his base case is that inflation will return to 2% without a significant downturn or big increase in unemployment.
2. Inflation Fight Not Over. It’s the early stages of disinflation. Goods inflation shows clear signs of being beaten but key services have not even begun to show signs of disinflation. That’s going to take months. Specifically, the core services excluding-housing component of the Fed’s favored inflation indicator, the Personal Consumption Expend Deflator (PCED) needs to come down before central bank tightening will stop.
3. Strong Warning Against Defaulting. “There’s only one way forward here, and that is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations when due,” said Mr. Powell. “And any deviations from that path would be highly risky, and that no one should assume that the Fed can protect the economy from the consequences of failing to act in a timely manner.”
4. A Unique Moment. “This is not a standard business cycle, where you can look at the last 10 times there was a global pandemic, and we shut the economy down, and Congress did what it did,” Mr. Powell said. “It’s just…it’s unique. I think certainty is just not appropriate here.”
5. It’s Complicated. Federal Reserve chairmen traditionally did not speak about policy stance of the central bank, leaving investors to figure it out over time. In the last 50 years, Fed chairs began to speak in cryptic terms about current policy. In 2006, Ben Bernanke changed Fed transparency, and Janet Yellen and Mr. Powell have followed his lead by conducting press conferences every two months and speaking plainly. Which highlights a new challenge in interpreting the Fed chair’s policy pronouncements at press conferences: It’s complicated. Consider this quote from Mr. Powell the Feb. 1, 2023 : “Again, we don’t see it (rate hikes) affecting the services sector ex-housing yet. But I mean I think our assessment is that we’re not very far from that level. We don’t know that though, we don’t know that. So, I think we’re, you know, we’re living in a world of significant uncertainty.” Mr. Powell is trying not to be cryptic but explaining Fed policy presents a new challenge. Being transparent about complexities at a live press conference is hard.
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