Fed’s Powell Stands Firm, Plans Higher Interest Rates
The Federal Reserve (Fed) is holding the course to do what it takes to bring down inflation and has no plans to back off raising benchmark interest rates anytime soon.
Fed Chairman Jerome Powell made these points clear during a public appearance this morning.
The Fed goal is to bring down 40-year high inflation to a baseline of 2%. The Fed will continue its efforts to do so indefinitely despite any costs to the economy or the stock market.
Fed plans to act strongly against inflation
Powell’s comments followed previous Federal Open Market Committee (FOMC) members saying earlier this week that aggressive interest rate hikes will continue.
“We need to act now, forthrightly, strongly, as we have been, and we need to keep at it,” Powell said. “The longer inflation remains well above target, the greater the risk the public will see higher inflation as the norm. That has the capacity to raise the costs of getting inflation down.”
The federal funds rate is in a range between 2.25% to 2.50% following four raises in benchmark interest rates so far this year. The Fed plans to raise rates another 75 basis points at the end of this month.
Powell participated in a Q&A session as part of the Cato Institute 40th Annual Monetary Conference. The Cato Institute is a libertarian think-tank based in Washington, D.C.
His remarks followed previous public comments from Fed Vice Chair Lael Brainard and a speech last week by fellow FOMC member Cleveland Federal Reserve President Loretta J. Mester. All have stated that the Fed has more work to do indefinitely to fight high inflation.
The Fed is focused on its “responsibility for price stability” which, according to Powell, means 2% inflation over time.
Market takes Powell stance in stride
The stock market was on edge ahead of Powell’s morning speech, but didn’t sink heavily after the opening bell.
By mid-morning all three major indexes rallied to the upside, erasing any early losses. This followed a strong day on Wednesday when the indexes were up 1-2% on the day, breaking the past week of poor performance.
The technology sector was up early Thursday despite Powell’s continued calls for tougher policy. FAANG stocks, which have struggled most of the year, were mostly up to start the session. FAANG refers to technology companies that include Facebook (now Meta), Amazon, Apple, Netflix, and Google (now Alphabet). The only laggards in the group were Netflix and Google which were slightly down mid-morning.
Powell’s words also didn’t affect GameStop (GME) which spiked overnight into Thursday and was higher still by 7.5% mid-morning. GameStop reported second quarter earnings Wednesday after market close along with announcing a crypto exchange partnership.
Fed committed until job is done
The Fed is trying to avoid past monetary policy shortcomings 40 years ago. Less aggressive efforts in the ‘70s spurred consumer fears, even fostering expectations of higher interest rates and inflation to grow continuously.
Powell is facing headwinds from the economy where a solid jobs market and consumer spending are holding strong despite higher costs at the cash register.
“I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done,” Powell emphasized.
The next central bank meeting is slated for Sept. 21-22.