Powell: "Not the Time to Raise Interest Rates... Inflation and Supply Chain Disruptions Will Continue" (Summary)

[Image source=Yonhap News]

[Asia Economy New York=Special Correspondent Baek Jong-min] Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), stated that the tapering of asset purchases is not a signal for interest rate hikes and assessed that the economy is experiencing strong growth. While he said strict criteria would be applied to dispel concerns that tapering would lead to rate hikes, there was a subtle change in the expression regarding inflation being temporary.

Chairman Powell actively ruled out the possibility of a rate hike during a press conference following the Fed’s announcement on the 3rd (local time) after the two-day Federal Open Market Committee (FOMC) regular meeting, where they announced the decision to keep the benchmark interest rate unchanged and to start tapering at the end of this month.

The market also evaluated the tapering announcement as expected, focusing on perceptions of inflation and the timing of interest rate hikes.

Powell emphasized, "Even with tapering, the Fed will strongly support the economy," and added, "Now is not the time to raise interest rates."

He said, "We will wait to see how the economy develops until mid-next year," and "The central bank can be patient with rate hikes." He further stressed, "Additional strict conditions must be met for a rate hike."

Powell stated, "The Fed is prepared to speed up or slow down bond purchases if necessary."

He also explained that the word "transitory," which had been used in previous statements to imply that the rise in inflation would eventually disappear, was revised to express that inflation is expected to be temporary.

In the statement, the Fed replaced the word "transitory" regarding inflation with the phrase "expected to be transitory."

CNBC reported that since senior Fed officials recently expressed concerns about rising inflation, it was expected that the phrase "inflation is transitory" would disappear from this statement, but the Fed modified the expression slightly and maintained the stance that inflation is temporary.

Powell judged that inflationary pressures would continue but economic growth would persist.

He forecasted, "Supply chain bottlenecks will continue into next year and inflation will rise," but added that once supply chain bottlenecks ease, growth will continue and inflation will decline.

In response to questions about whether inflation management was delayed, he said, "The Fed is appropriately adjusting monetary policy," and "The Fed is in the right position and will use tools (interest rate hikes) whenever necessary."

Powell expressed a desire for the labor market to heal further and emphasized that strict conditions would apply for interest rate hikes.

He was not concerned about wage increases. He said inflation was caused by surging demand and bottlenecks, not by a tight labor market, and that he had not seen signs of rapid wage increases leading to price hikes.

He also emphasized that wages are not keeping pace with inflation. Powell said it is difficult to predict when supply chain bottlenecks will be resolved, but ultimately they will normalize, though the timing is very uncertain.

He predicted that the labor market could achieve maximum employment in the second half of next year and expected economic growth to rebound this quarter.

Although the statement and Powell ruled out the possibility of an early rate hike, the market judged that the likelihood of a rate hike starting in mid-next year has increased. According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of the first rate hike in June next year rose to 61.4% after the tapering announcement. The probability of a July rate hike also reached 71.6%.

On the other hand, David Kelly, Chief Global Investment Strategist at JP Morgan Asset Management, predicted that the Fed would refrain from raising rates until the last FOMC meeting of 2022. He estimated that the Fed would raise rates after a certain interval following the end of tapering.

Meanwhile, the U.S. stock market closed higher that day. Although there was some correction during the session reflecting FOMC concerns, the Dow Jones Industrial Average rose 0.29%, the S&P 500 increased 0.65%, and the Nasdaq closed up 1.04%. CNBC reported that remarks indicating the economy is growing enough to start tapering stabilized investor sentiment.

The U.S. 10-year Treasury yield expanded its gains after the tapering announcement this month, entering the 1.6% range.

On the same day, Powell said regarding stock trading by senior Fed officials, "We took swift action to address ethical issues of policymakers," and added, "The Fed could not have imagined the way they traded stocks."

Powell did not give a specific answer to questions about his reappointment. Earlier, President Joe Biden had announced that he would soon nominate the next Fed chairman.

This content was produced with the assistance of AI translation services.