The Federal Reserve chairman gave speech on 26th of August 2022 in which he indicated the challenges of inflation in front of US economy.
Contents
The Speech
The Federal Reserve chairman gave speech on 26th of August 2022 in which he indicated the challenges of inflation in front of US economy.
The first challenge is about the changing structure of economy. The second challenge mentioned by Mr Powell was about conducting monetary policy under high level of uncertainty. He said that the Federal Open Market Committee’s overacting focus right now is to bring inflation back down to our 2% goal.
The fed chairman agreed there are unfortunate costs of reducing inflation, however, failure restore price stability would bring greater pain. He also said the burden of high inflation affect heavily to the section of society who are least able to bear it.
Investors Slayed on Friday
The investors in USA were hoping for a signal from the fed chairman that it would soon moderate rate of increase of policy rates in near future. But the fed chairman made it very clear that its main aim was to contain rising prices and the moderation in policy rates in your future is less likely.
Although the unemployment rate in USA is low at 3.5 % however increasing prices the cost of concern for the economy and the government.
Inflation
An inflation index that the Fed closely monitors revealed on Friday that prices actually decreased 0.1% from June to July. Although prices increased 6.3% from a year earlier in July, this was less than the highest level since 1982, when they increased 6.8% from a year earlier in June. The decline was mostly caused by decreasing gas prices.
Guiding Principles
The Fed, according to Powell, is principally guided by three lessons:
The first lesson is that it is within the power and obligation of central banks to ensure low and steady inflation.
The second lesson is that the trajectory of inflation over time can be significantly influenced by the public’s expectations for future prices. Expectations of increased inflation are more likely to become entrenched the longer the current period elevated prices lasts.
The third lesson is that persistence is required to complete the task. In order to stop the high inflation and begin the process of bringing prices down to the low and stable levels that were the norm until last year, a protracted period of extremely restrictive monetary policy was eventually required.
Conclusion
At the moment what fed is doing is perhaps right but the question arises is the timing of Fed’s action is right. I mean it was made very clear by many experts that massive debt was being built in the economy. During pandemic huge amount of money printing was done and near Zero policy rates were kept for too long. Did we allow the bubble to get bigger and bigger or was the money pumping was need of the hour then? Well! That will become apparent in coming years but right now Federal reserve got to extinguish the fire of inflation which, if left unchecked can burn the whole jungle.
Interesting times ahead for US economy and the world economy.
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