Jay Powell’s hawkish stance on inflation goes beyond Omicron’s threat

Jay Powell’s hawkish stance on inflation goes beyond Omicron’s threat


With financial markets already selling off due to concerns about the Omicron coronavirus variant, it seems a strange moment for the Fed chairman to make his most hawkish comments on monetary policy since the beginning of the pandemic.

But on Tuesday, Jay Powell Effectively discard The Fed’s previous stance on the soaring inflation and hinted that it supports the accelerated reduction of the central bank’s large-scale bond purchase program, giving policymakers room to raise interest rates faster than expected.

By doing so, Powell sent a clear message to the market: fight against inflation, beat Set a 30-year high last month, it is now the central bank’s top priority, which has spent nearly two years focusing on boosting demand and employment.

Kathy Bostjancic, chief American financial economist at Oxford Economics, said: “Inflation has advanced their plan.” “This is something they didn’t expect. Now they need to adjust and adjust their policies to achieve their goals.”

In two days of congressional testimony this week, Powell briefly acknowledged the emergence of the Omicron variant, which he described as a potential risk to economic growth, but has not yet been “included” in the Fed’s forecast. But he promised most of the time to address what he called “continuously higher inflation.”

Powell warned that the price pressure previously concentrated in several corners of the economy has expanded. He no longer uses the word “temporary,” which the Federal Reserve has consistently used throughout the year because it insists that the surge in inflation is mainly related to temporary supply chain disruptions.

So far, the most obvious sign of Powell’s determination not to let inflation “deep root” is his revealing that he will support a large number of Faster The bank’s bond purchase plan was “gradually reduced”, and the stimulus plan “may be a few months earlier than planned” to be completely withdrawn.

Powell told the Senate Banking Committee on Tuesday that although the number of unemployed persons has increased by approximately 4.2 million compared with the beginning of the pandemic, and despite the imminent threat of Omicron, the need to stimulate the economy is “significantly reduced.” At another hearing on Wednesday, he insisted on using the same script.

Krishna Guha, a former Fed staff member and current Evercore ISI vice chairman, said: “This is a very sudden change in the Fed: the eight-month reduction plan was announced only four weeks ago, and the New York Fed Two weeks before the start of implementation.”

Guha added that a sudden change in tone would “intensify the feeling” that the possibility of the Fed making a “step change” in its interest rate plan is “higher.”

this announcement The Fed will begin to reduce its $120 billion monthly asset purchase plan in early November, after several months of deliberations on the potential strength of the economic recovery. This also marks the end of emergency measures taken to avoid economic disaster at the beginning of the pandemic.

The Fed initially stated that it would reduce the purchase scale by $15 billion per month, which means that the plan will end in June 2022, and emphasized that it will be flexibly adjusted according to economic conditions.

But Barclays economists said this week that they now expect the Fed to speed up its downsizing at the January meeting so that the stimulus plan ends in April. Barclays added that this will pave the way for a rate hike in a month’s time, and it is expected to raise interest rates two more times in 2022 and then four more times in 2023.

“What’s happening here is that Powell is paying attention to the level of inflation and the rate of economic growth, and is beginning to worry that the Fed has been too loose for too long,” said economist Tim Duy. SGH Macro Advisor and University of Oregon. “They are changing the narrative.”

This week, the financial market reacted violently to Powell’s remarks, because the early termination of the asset purchase plan may mean that the rate of interest rate hike was much earlier than expected.

On Tuesday, the U.S. stock market fell sharply, and the yield on the two-year U.S. Treasury bond, which is most sensitive to monetary policy adjustments, soared to 0.6%, after hovering at a low of 0.44% earlier in the trading day. It is currently 0.55%.

However, some Fed observers do not believe that the Fed will abandon its long-term cautious approach so quickly, especially considering the huge unpredictability surrounding new variants.

Roberto Perli used to work at the Federal Reserve and now leads Cornerstone Macro’s global policy team. He divided Powell’s use of the term “consideration” when discussing the Fed’s reduction plan this week, and the chairman of the central bank emphasized that officials will pay close attention to the data.

“If the Fed [sped] Now it is gradually decreasing, and it either sends out a panic message or admits that it made a mistake a month ago,” Paley said.

Eaton Vance’s chief investment officer for fixed income, Eric Stein, agrees that substantial tightening of financial conditions may encourage the Fed to resume its patient approach. But he added that given the “strong and active” degree of risk markets, this will need to deteriorate significantly.

But for others, Powell made a much-needed adjustment this week, turning himself from a moderate dove into a hawk, and decided to deal with inflation more aggressively.

“The economy can definitely withstand slightly higher interest rates,” said Constance Hunter, chief economist at KPMG. “This change in position is consistent with economic data and is also consistent with maintaining [the Fed’s] To ensure that inflation does not get out of control. ”

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