On Wednesday we got the FOMC decision, and Federal Reserve Chair Jerome Powell’s roughly 50 minutes press conference, but it was hardly worth the watch as he said price growth will likely resume cooling this year, but avoided offering a timeline for rate cuts. It seems, the burst of inflation seen in the first quarter has reduced policymakers’ confidence that price pressures are ebbing.
The central bank’s preferred gauge, the personal consumption expenditures index, rose 2.7% in March from a year earlier. That compared to a 2.5% advance in January. Policymakers explicitly acknowledged that data by adding a line to their post-meeting policy statement noting the “lack of further progress” toward their inflation goal in recent months.
Powell’s remarks reflected a broader shift in thinking at the Fed toward holding borrowing costs at a two-decade high for longer.
Three points to make on all this.
First Central Bankers are still not admitting they caused the inflation breakout due to their dramatic rate cuts, and QE programmes, done in tandem with Governments providing massive financial support through COVID. This is the root cause of the problem, yet of course the US Treasury continues to run a larger deficit, which is costing more because of the higher rates.
Second Powel was explicit of not be influenced by the political context, US election and all, arguing the FED was independent. We know some politicians have a different perspective on this issue.
Third, being totally reactive to data means the FED is looking back not forward. This may well mean events will catch them out. They have yet to acknowledge that the so called R star or neutral rate is significantly higher than they think it is, so the road is wide open to potential policy failure.
Meantime, many Americans have run down their savings, are putting more or credit, and housing affordability continues to deteriorate for many.
Which sort of begs the question: who is the FED really working for? Is it all Americans as he suggests?
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