Fed’s dovish signalling: 5 takeaways from Powell’s last night speech

Fed interest rate unchanged: The US Federal Reserve has decided to maintain the interest rate at its 23-year high amid the persistent inflationary pressure in the US economy. The US central bank chairman Jerome Powell, in the press conference after the Federal Open Market Committee meeting, made it clear that the committee requires more confidence before moving ahead with any rate cuts. 

Here are some of the major takeaways from Powell’s last night press conference that are likely to have a strong impact on the economics and markets around the world. 

Require greater confidence before any rate cuts

In the press conference followed by the Fed’s two-day meeting in Washington, Jerome Powell mentioned that the US central bank wants to be more sure that inflation is getting closer to its target of 2 per cent. However, recent data has not given them that certainty, as inflation readings have been higher than expected. 

“So far this year, the data have not given us that greater confidence in particular” that rate cuts are appropriate. Readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected.”

The US central bank is keeping a close eye on inflation to make sure it's not rising too fast, which could affect the economy. They want to be sure before making any decisions about changing interest rates.

Rate hikes are ‘unlikely’ 

Powell suggested that the next change in policy rates is unlikely to be an increase. He mentioned that the committee requires convincing proof that their current policy is not effective enough in curbing inflation to their target of 2 per cent. 

“I think it’s unlikely that the next policy rate move will be a hike. I’d say it’s unlikely. We would need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation sustainably down to 2 per cent over time. That’s not what we think we’re seeing.”

Election plays no role in rate cut strategy

When questioned about the upcoming presidential elections in the United States, Powell made it clear that politics plays no role in the central bank’s rate-move timings. 

“It’s hard enough to get the economics right here. These are difficult things, and if we were to take on a whole other set of factors and use that as a new filter, it would reduce the likelihood we’d get the economics right.”

Keeping the Fed alienated from any political intervention in US economic policymaking, Powell said, “This just isn’t part of our thinking. It’s not what we’re hired to do.”

Powell underplays stagflation concerns 

Federal Reserve Chair Jerome Powell dismissed worries of stagflation—a combination of economic stagnation and high inflation. Powell shared that current inflation levels are much lower compared to the stagflation crisis of the 1970s, and unemployment rates are close to historic lows.

“I don’t really understand where that’s coming from. The economic growth is at 3 per cent and inflation is below 3 per cent. I don’t see the ‘stag’ or the ‘-flation.” 

Fed’s shrinking balance sheet, not a policy indicator 

Powell highlighted that the decision to ease the pace of reducing the central bank's balance sheet is not aimed at stimulating the economy or loosening monetary policy. Rather, it is intended to ensure a smooth process of gradually shrinking the balance sheet to its desired level. 

“It really is to ensure that the process of shrinking the balance sheet down to where we want to get it is a smooth one and doesn’t wind up with financial market turmoil the way it did the last time we did this, and the only other time we’ve ever done this.”