Breitbart Business Digest: Powell gleams with hawk feathers
Federal Reserve officials have been trying to convince the markets of their commitment to fighting inflation by talking bluntly about the unwanted costs they are willing to incur and incur in order to succeed.
Fed Chairman Jerome Powell first participated in this tough conversation last summer in Jackson Hole. In this short but memorable speech, Powell pointed out the costs of tightening quite clearly. Growth will fall below its long-term average, labor markets will suffer, and businesses and households will be squeezed by higher interest rates, Powell said.
“Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, it is very likely that there will be some easing of conditions in the labor market. While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also cause some pain for households and businesses,” Powell said.
The point of this was to dispel the idea that the Fed would falter in the face of an economic downturn. Before Jackson Hole, many on Wall Street and beyond were convinced that a recession would force the Fed to stop raising rates early and start cutting interest rates in 2023. The “landing” for the economy has convinced many that if a hard landing looks more likely, the Fed will step back from fighting inflation.
This worked for a while. However, as the new year rolls on, financial conditions continue to improve as the stock market races ahead and borrowing costs are down significantly from their October highs. In the first week of this year alone, companies issued $63.7 billion of US debt, compared to $36.6 billion in the last five weeks of 2022, according to a report in Financial Times with reference to Dealogic data. This is not what should happen when financial conditions are allegedly “restrictive”.
The Fed itself knows this. The minutes of the December meeting contain a not-so-subtle complaint about financial relief.
“Participants noted that since monetary policy largely worked through financial markets, an unjustified easing of financial conditions, especially if it was caused by a misperception by the public of the Committee’s response function, would complicate the Committee’s efforts to restore price stability,” the minutes read. . .
It is clear that Powell’s vague words about “some problems” and “below trend growth” – as startling as they were in August last year – do not mean much to the markets. So Fed officials have become more candid about the economic, social, and political hurdles they expect to face and overcome in their anti-inflation crusade.
On Monday, we pointed out that the minutes of the Fed’s December meeting discussed in great detail the likelihood that higher unemployment would disproportionately lead to unemployment among blacks and Hispanics. In an era obsessed with racial equality and justice, this is an extremely hawkish statement. Fed officials have acknowledged that their fight against inflation is likely to be what the left now calls systemic racist.
Speaking in Stockholm on Tuesday, Powell said Fed officials expect a political backlash.
“Price stability is the foundation of a healthy economy and delivers immeasurable benefits to the public over time,” Powell said. “But restoring price stability in the face of high inflation may require measures that are unpopular in the short term as we raise interest rates to slow the economy.”
Powell is trying to warn Wall Street that she can’t win this battle. Wall Street, however, is not yet in the mood to accept this message.
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texasstandard.news contributed to this report.
