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U.S. Federal Reserve Chair Signals Potential Need for Further Interest Rate Hikes, Cautions on Inflation

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US Federal Reserve Chair Jerome Powell has suggested that further interest rate hikes may be necessary to control inflation. In a speech on Friday, Powell acknowledged the decline in the pace of price increases over the past year, but emphasized the need to bring inflation down to the desired 2% goal. Powell’s remarks come amidst surprising overperformance of the US economy and concerns about rising inflation.

Powell stated, “It is the Fed’s job to bring inflation down to our 2% goal, and we will do so.” These comments indicate that the Federal Reserve may choose to raise interest rates in order to prevent inflation from spiraling out of control.

Following Powell’s speech, there was a mixed reaction from financial analysts. Some noted that while he highlighted the potential need for further tightening, softer incoming data may keep the Fed comfortable with current levels. Others suggested that the speech was largely non-information, acknowledging progress but reiterating the need for caution.

The market response to Powell’s speech was initially positive, with investors hopeful for news that would reverse the recent downward trend. However, there is still uncertainty regarding the Fed’s future actions. August has been a difficult month for the market, and investors are closely monitoring any updates that could impact their positions.

Joseph Lavorgna, Chief US Economist at SMBC Nikko Securities, believes that Powell’s comments lean towards the hawkish side. Lavorgna does not see any indication that the Fed will cut rates anytime soon. Instead, he suggests that the Fed may choose to hike rates further or maintain current levels.

Stuart Cole, Chief Macro Economist at Equiti Capital, London, noted that Powell’s message aligns with expectations. Cole believes that progress has been made in combating consumer price index (CPI) inflation, but it is still too early to declare victory. According to Cole, the Fed is prepared to raise rates further if necessary.

Quincy Krosby, Chief Global Strategist at LPL Financial, emphasized Powell’s focus on the trajectory of inflation. While there has been a decline in inflation over the past few months, the 12-month trajectory remains elevated. Krosby suggests that there is still work to be done before the Fed can declare victory.

Overall, Powell’s speech was seen as less hawkish than anticipated by the markets. His message indicated that the Fed will proceed carefully and take a data-dependent approach in deciding whether to tighten further or maintain the current policy rate. This more gradualist and incremental approach is seen as necessary given the uncertain conditions in the economy.

The reaction in the market suggests that investors may need to adjust their expectations. The possibility of higher rates for a longer period than initially anticipated could lead to a contraction in valuations. The dollar may also lose some altitude, particularly in comparison to the euro.

Powell’s speech aimed to strike a balance between acknowledging progress, avoiding dramatic messaging, and emphasizing the need for caution. The Fed remains committed to its goal of controlling inflation, but the path forward will be determined by incoming data and economic indicators.

More detail via Reuters here… ( Image via Reuters )

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