Nothing is more beautiful than when a central banker gets lyrical. That was the case of Jay Powell, the president of the US Federal Reserve (Fed), this Friday in Jackson Hole. In the shadow of the (disappearing) glaciers of the Grand Teton Mountains, which border Yellowstone to the north, Powell has given his opinion on how the Fed is running the US economy: “We are sailing under the stars a cloudy sky.”
Powell’s phrase may not go down in the history of literature, but it gives a good signal about the situation in which the Federal Reserve finds itself. Contrary to the European Central Bank, whose president, Christine Lagarde, spoke later and also defended that interest rates will be at sufficiently restrictive levels “for as long as necessary” – the US issuing institute is bringing the bullish cycle to an end. of monetary policy. The problem is ending that cycle by achieving a soft landing for the US economy and not a recession. And that’s where the sky is cloudy.
Still, Powell is doing what in navigation is called “dead reckoning,” as former Dallas Federal Reserve Chairman Richard Fisher told CNBC, a television channel specializing in the stock market. That, for the Fed, means keeping an eye on all the data. And the bottom line is that, as Powell stated, “although inflation has come down from its peak – which is welcome – it is still too high.” The central bank president stated that “we are prepared to raise rates further if necessary and intend to keep policy tight until we are clear that inflation is moving sustainably towards our target.”
The Fed wants the medium-term prices of the underlying Personal Consumption Index – which is the indicator it uses to measure inflation – to be at 2%. Currently, they are at 4.1%. The PCE -as this indicator is known by its acronym in English- is less volatile than the Consumer Price Index (CPI), which stands at 4.8%.
Powell’s words come to say that further interest rate hikes will be necessary this year, and that, in addition, the Fed will take longer to start reducing the price of money in 2024. It is, in general, what the market anticipated . Analysts believe the Fed will not raise rates next month, but will do so at the next policy meeting in November.
At the same time, of course, Powell has explicitly ruled out hard monetary policy when he has said that “the Fed will proceed carefully.” It is, thus, a combination of lime and sand. The Chancellor of Cambridge University’s Queen’s College, Mohamed El-Erian, who was CEO of the world’s largest fixed-income manager, Pimco, and the giant investment fund at Harvard University, summed up Powell’s words in an effective tweet: “A speech in the middle pulling a little down.” That negative neutrality was enough for the market – both fixed income and equities, currencies and commodities – to barely budge on Powell’s words. For now, core inflation – which excludes energy and fresh food, and is therefore less volatile than the general index – is showing more resistance to falling. As long as that doesn’t change, the Fed will continue to slowly raise rates, because core inflation can trigger unexpected rises in the general index.
But at the same time there is the fact that each rate hike takes between three and six months to show up in the economy. For the time being, activity in the United States is showing more than considerable resistance to monetary tightening, despite the fact that mortgages have the highest interest rates in 16 years, car sales are suffering and job creation is slowing.
