In stark contrast to his speech last year, where he called inflation transitory and worried about monetary tightening hurting economic activity, the US Federal Reserve Chairman Jerome Powell has said that halting inflation is now primary.
He said that the monetary authority will continue its interest rate hike even if it means “some pain” to the economy. The central bank placing inflation control first may mean “sustained period of below-trend growth”.
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“The Federal Open Market Committee's (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labour market condition,” Powell said.
“The burden of high inflation will fall heaviest on those who are least able to bear them,” the Fed chief said, while adding that there would be some pain to households and businesses, but these are the "unfortunate costs of reducing inflation”.
Deepak Jasani, Head of Retail Research, HDFC Securities, said that Powell’s speech dispelled any hope of a less-aggressive monetary policy stand. “He relied on the historical record that cautions strongly against prematurely loosening policy,” added Jasani.Economic data crucial
Powell’s statements were more or less what the market was expecting, said Naveen Kulkarni, Chief Investment Officer, Axis Securities. While Powell is aggressively going after inflation, Kulkarni said that the speech also points to the indication that the pace of hike may be reduced based on incoming data.
The Fed has already raised interest rates by 225 basis points in 2022.
“Fed Chairman Powell, in his Jackson Hole speech, mentioned that the Fed does not want inflation anchored at a higher level and is not afraid to keep the monetary policy restrictive for some time, even if it entails some job losses and growth slowdown. On the other hand, he also mentioned that the Fed will keep an eye on incoming data to chart the future extent of rate increases, and at some point in the future, after further tightening, when inflation expectations start moderating, the Fed will look to reduce the pace,” said Kulkarni.
He said that the US stock markets did have a knee jerk reaction and that there was an increase in the yields, but the “movement reversed a bit, stabilising the markets and yield”.
“We believe this makes the incoming US economic data all the more important to chart the future US Fed course of action,” he added.
Soumyajit Niyogi, Director of India Ratings and Research, too said that Powell’s speech was in line with expectations. “The US markets did have a knee jerk reaction, since the markets had started expecting a benign communication. But inflation has been alarming and much higher than the tolerance level so the Fed is just reiterating its July stand. They haven’t turned more hawkish,” he said.
Effect on Indian market
“Taking a cue from the US stock markets, the Indian equity markets might show some jitteriness on Monday's opening but the debt market will continue to reflect the domestic growth and inflation dynamics,” he said.
Jasani sees some impact to the Indian markets from the global sentiment but believes the fall will be limited. “Indian markets could get impacted by the turn in global sentiments and as more investors turn risk averse ahead of the historically down month of September. However the intensity and amount of fall in India will be limited as its economy may not be linked fully with the happenings in the US economy,” he said.
“FPIs as a group may get swayed initially by the bearish outcome but later come back into India markets given its relative resilience and higher growth expectations,” he added.
Aishvarya Dadheech, Fund Manager, Ambit Asset Management sees a rate hike of 75 bps in the September meet. “Only new insight which came out of this speech was the Fed acceptance that economic growth might be compromised over inflation,” he said.
According to Dadheech, the market had already anticipated this. “The market was already discounting this hike and was not expecting any reversal in their policy normalisation stance any time soon. With initial signs of the US economic data showing signs of deterioration (weak housing sales, PMI data, etc), it will be interesting to see how far the FED can stay on hawkish ground,” he added.
Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, too believes that the speech indicates a 75 bps hike in September. “Powel sounded ultra hawkish in his brief speech at Jackson Hole. The Fed chief warned of "some pain" ahead in the economy. This is an indication that the rate hike in September can be large, even 75 bp in September, even though he reiterated that the rate hike decisions will be data driven,” said Vijayakumar.
He sees equity markets being negatively impacted from this. “Markets will be concerned about the tight monetary conditions persisting longer than expected,” he said.
Surprised a few
Some experts pointed out that investors who had taken Powell’s July speech after the FOMC meet as the Fed becoming dovish would have been surprised. After the press conference, there was much debate over whether the central banker had retained its hawkish stance or softened its stance. The first camp pointed to Powell’s repeated mentions of inflation and how it had to be brought down, while the second ‘dovish’ camp pointed to the Fed Chair saying “at some point, it will be appropriate to, to slow down”. Ritikia Chhabra, Economist and Quant Analyst at Prabhudas Lilladher said, “Investors who cheered Fed's dovish comments in July Fomc meeting and were pricing in rate cuts in early 2023 are hugely disappointed with this hawkish message from the Fed.”
That said, Chhabra believes that, at Jackson Hole, “the right message was sent across to investors that his (Powell’s) top priority is taming inflation, and not economic growth”.(Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.)