Powell: It took two years to catch inflation… Further rate hikes are inevitable

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U.S. monthly unemployment rate for the past year

Fed Chairman Jerome Powell said it would take two years to get inflation under control, and further rate hikes were inevitable if employment data continued to remain strong.

Chairman Powell said this at the Economic Club Seminar held in Washington, DC on the 7th (local time).

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◇ “It takes a lot of time to catch up on prices”
: “The process of declining prices has begun, but it will take a considerable amount of time and will not go smoothly,” he added. Accordingly, he emphasized, “We must maintain a tightening stance (rising interest rates) for the time being.”

This is similar to the last remark. After raising the interest rate by 0.25 percentage point at the Federal Open Market Committee (FOMC) meeting on the 1st, he said at a press conference, “Inflation has begun, but it is still in the early stages, and we will continue to tighten the stance for the time being.”

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His remarks were the same as last time, but the situation has changed a lot. The FOMC comments were made before the release of the Labor Department’s employment data over the weekend.

However, this time, the remarks were made after the release of the employment indicators.

On the 3rd, the U.S. Department of Labor announced that the number of new nonfarm payrolls last month was 517,000. This is more than twice as many as the previous month (223,000). This is also significantly higher than the market’s estimate of 188,000.

As a result, the unemployment rate in January was 3.4%, the lowest since May 1969 in 53 years.

Despite the Fed’s aggressive rate hike, the job market remains hot.

◇ If the labor market continues to be strong, additional interest rate hikes are inevitable
: Perhaps he was conscious of this, he said, “The labor market is exceptionally strong.” “I didn’t expect it to be this strong,” he said, particularly regarding the January employment statistics.

He avoided direct answer to a reporter’s question asking whether the Fed’s decision to raise interest rates by 0.25 percentage point last week would have been affected if he had known the employment statistics would be this far, only stating that “it shows why the tightening policy takes a considerable period of time.”

However, he said, “the labor market is too strong” and “I think further rate hikes are necessary.” “If the labor market remains hot, we may have to do more,” he added. This clearly demonstrated its willingness to further raise interest rates.

◇ It takes 2 years to catch inflation
: When asked how long it would take for inflation to return to the Fed’s target of 2%, he replied, “This process will take until next year.” That is, he said it would take two years.

This means that the Fed can maintain its tightening stance until next year. This seems to suggest that more interest rate hikes are needed than the market expected.

According to the Fed’s dot plot (interest rate hike expectations), the base interest rate in the US is in the range of 5.0% to 5.25% at the end of the year. Chairman Powell seems to have implied that the benchmark interest rate in the US could be higher than this.

◇ The market rallied despite the additional rate hike remarks
: The point of Chairman Powell’s remarks that day was that additional rate hikes were inevitable given the strong labor market.

There were two topics that Chairman Powell threw to the market that day. That’s when prices start to fall. However, as the employment indicator is stronger than market expectations, additional interest rate hikes are needed.

At first, the market rose when Chairman Powell said that inflation had begun, but when he said that an additional interest rate hike was necessary, the market ended up rising all at once after a seesaw, such as reducing the rate of increase. The Dow rose 0.78%, the S&P500 1.29% and the Nasdaq 1.90% each.

The market seems to have put more weight on the statement that inflation has begun. It also seems that there has been an influx of low-priced purchases.

Source: Donga

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