Introduction to the Federal Reserve’s Current Situation
The America’s central bankers continue to deal with the double strike of potentially higher inflation and a slow labor market, said Jerome Powell, chairman of the Federal Reserve, on Tuesday, and called it a "challenging situation" for the political decision-makers of the Fed.
Current Interest Rates
But for the time being, interest rates are in a good place to deal with both threats, Powell said, indicating that he sees no urgency to reduce interest rates aggressively. "The increasing downward risks for employment have shifted the balance of risks to achieve our goals," said Powell at an Economic event in Warwick, Rhode Island.
The Fed’s Stance on Inflation
The FED Chief characterized the idea that tariff inflation can die as a "reasonable basic case", but added that "uncertainty over the inflation path remains high" and that the officials "have to ensure that this increase in prices does not become a continuing inflation problem". Powell’s latest comments come as the debate about the further interest rate level has been increasing for the first time after the first temperature of the political decision-makers.
Expectations of Interest Rate Cuts
Investors expect the Fed to reduce interest rates by the end of the year, according to Futures, which reduces the central bank’s lending rate by a further half point. This would bring the most important interest rate of the Fed to the lowest level since October 2022. On Tuesday, Powell confirmed what he told reporters during a press conference after the most recent decision by the Fed on September 17, but it indicated that there is no crisis that requires further interest rate reductions, especially large ones.
The Double Mandate of the Fed
The Fed’s political decision-makers remain in a bond, with President Donald Trump’s widespread tariffs increasing a few prizes, while employment growth grants a break and takes both sides of the double mandate of stable prices and maximum employment of the FED under stress. "Two-sided risks mean that there is no risk-free way," said Powell.
Concerns About the Labor Market
Two members of the powerful Governor Council of the FED, both Trump appointees, have made public concerns about the US labor market while reducing the potential effects of Trump’s tariffs on prices. Fed Deputy Chairman Michelle Bowman said on Tuesday: “The last data has resulted in a significant fragile labor market" and that "tariffs will only have a small and short-lived influence on inflation in the future".
The Neutral Interest Rate
According to Miran, the so-called neutral interest rate, which represents a theoretical degree of credit costs that neither stimulates nor does not stimulate or dampen the economic activity, is actually lower than most economists. This means that the key interest rate of the Fed should be "almost 2 percentage points lower". That would mean eight quarter-point cuts or four half-point cuts.
Different Opinions Among Fed Officials
Some Fed officials are not convinced that aggressive installments will be required in the coming months. In an interview with CNBC on Tuesday, the President of Chicago Fed said that inflation remains a problem for the FED because it has not yet fully returned to her 2% goal. "After all, the tariffs can gradually drop an appropriate amount if we can get this stagflationary dust out of the air," said Goolsbee. "But since inflation has been above the finish line for four and a half years in a row, we have to be a little careful when we become excessively aggressive."
The Preferred Inflation Indicator
The preferred inflation indicator of the FED – the price index of personal consumption – rose by 0.2% in July compared to the previous month, which gave the annual rate at 2.6% unchanged. The trade department will publish PCE data on Friday August. In an interview with The Wall Street Journal, The President of Atlanta Fed Raphael Bostic, who is not a voter in the Central Bank Policy Committee this year, said that "the risk of the price stability mandate is still the most important". "We receive signs from our contacts and from our surveys that the prices will probably increase a little more from here. So we will see an upward movement in inflation," said Bostic. "I’m worried about it," he added.
